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EAST ASIA AND THE PACIFIC
AUSTRALIA
Key Economic Indicators
[Billions of U.S. Dollars unless otherwise indicated]
1998 1999 2000 2
Income, Production and Employment:
Nominal GDP 3 .......................................................... 364.5 392.2 373.2
Real GDP Growth (pct) ............................................. 5.1 4.3 4.0
GDP by Sector: 4
Agriculture ............................................................. 11.5 12.9 11.5
Manufacturing ....................................................... 89.5 93.5 87.7
Services ................................................................... 248.3 266.9 262.4
Government ............................................................ 14.6 14.6 13.4
Per Capita GDP (US$) .............................................. 20,300 21,200 19,600
Labor Force (000s) ..................................................... 9,340 9,470 9,680
Unemployment Rate (pct) ......................................... 8.0 7.2 6.8
Money and Prices (annual percentage growth):
Money Supply (M3) ................................................... 7.6 10.1 10.1
Consumer Price Inflation .......................................... 1.6 1.8 3.0
Exchange Rate (Aust$/US$ annual average) .......... 1.59 1.56 1.70
Balance of Payments and Trade:
Total Exports FOB .................................................... 55.9 55.7 55.2
Exports to United States ....................................... 5.3 5.4 6.5
Total Imports CIF ..................................................... 60.8 65.1 58.7
Imports from United States .................................. 13.5 13.6 13.5
Trade Balance ............................................................ –4.80 –9.3 –3.5
Balance with United States .................................. –8.2 –8.2 –7.0
External Public Debt ................................................. 30.2 18.7 13.5
Fiscal Surplus/GDP (pct) .......................................... 0.2 0.7 1.2
Current Account Deficit/GDP (pct) .......................... 5.0 5.8 5.0
Debt Service Payments/GDP .................................... 1.8 1.9 1.9
Gold and Foreign Exchange Reserves ..................... 15.4 22.0 16.0
1 Exchange rate fluctuations must be considered when analyzing data. Percentage changes calculated in
Australian Dollars.
2 2000 figures are estimates based on available monthly data in October.
3 Income measure of GDP.
4 Production measure of GDP. ‘‘Manufacturing’’ includes manufacturing, mining, utilities, and construction.
1. General Policy Framework
Australia’s developed market economy is dominated by its services sector (65 per-
cent of GDP), yet it is the agricultural and mining sectors (7 percent of GDP com-
bined) that account for the bulk (58 percent) of Australia’s goods and services ex-
ports. Australia’s comparative advantage in primary products is a reflection of the
natural wealth of the Australian continent and its small domestic market; 19 mil-
lion people occupy a continent the size of the contiguous United States. The relative
size of the manufacturing sector has been declining for several decades, and now
accounts for just under 12 percent of GDP.
The Australian economy has recorded annual growth of above four percent since
1997, coming through the Asian economic downturn relatively unscathed. The re-
sultant improvement in the labor market has seen unemployment fall below seven
percent for the first time in a decade, with little hint of wage inflation. Other infla-
tionary pressures, however (e.g., a depreciating Australian dollar, strong domestic
demand, and higher oil prices), have forced the Reserve Bank of Australia (RBA)
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to raise official interest rates 150 basis points since November 1999. The introduc-
tion of the Goods and Services Tax (see Section 3 below) in July 2000 has also had
a one-off effect on prices, though its impact was less than expected.
The Liberal/National coalition government continued its program of fiscal consoli-
dation and debt reduction in its budget for the 2000–2001 fiscal year, announcing
a planned budget surplus of $3 billion.
2. Exchange Rate Policies
Australian dollar exchange rates are determined by international currency mar-
kets. There is no official policy to defend any particular exchange rate level, al-
though the RBA does operate in currency markets. The RBA is active in what it
describes as ‘‘smoothing and testing’’ foreign exchange rates, in order to provide a
generally stable environment for fundamental economic adjustment policies.
Australia does not have any major foreign exchange controls beyond requiring
RBA approval if more than A$5,000 in cash is to be taken out of Australia at any
one time, or A$50,000 in any form in one year. The purpose of this regulation is
to prevent tax evasion and money laundering; authorization is usually automatic.
3. Structural Policies
The government is continuing a program of economic reform, begun in the 1980s,
that includes the reduction of import protection and microeconomic reform. Initially
broad in scope, the program now focuses on industry-by-industry changes and re-
form of the labor market. The government is also continuing with the privatization
of public assets. Federal government ownership in telecommunications carrier
Telstra has been reduced (via two public floats) to 51 percent.
The General Tariff Reduction Program, begun in March 1991, has reached its con-
clusion, with most existing tariffs now at five percent or below. However, the pas-
senger motor vehicles, textiles, clothing and footwear industries are still protected
by high tariffs (15 and 25 percent respectively), where they will remain, pending
further review, until 2005.
July 2000 saw the introduction of the Goods and Services Tax (GST), accompanied
by significant cuts to personal income taxes. The GST is a broad-based consumption
tax levied at 10 percent (exempting only basic food, education, health, and char-
ities), and replaces the Wholesale Sales Tax and several other minor excises and
taxes.
4. Debt Management Policies
Australia’s net foreign debt has averaged between 30 and 45 percent of GDP for
the past decade, and in mid-2000 totaled $200 billion (43 percent of GDP). Aus-
tralia’s net external public debt is $16 billion, or around 4 percent of GDP. The Fed-
eral Government is using its privatization receipts and budget surpluses to further
reduce its debt obligations. The net debt-service ratio (the ratio of net income pay-
able to export earnings) has remained at or below 10 percent since 1997, down from
21 percent in 1990.
5. Significant Barriers to U.S. Exports
Australia is a signatory to the WTO, but is not a member of the plurilateral WTO
Agreement on Government Procurement.
Services Barriers: The Australian services market is generally open, and many
U.S. financial services, legal and travel firms are established there. The banking
sector was liberalized in 1992, allowing foreign banks to be licensed as either
branches or subsidiaries. Broadcast licensing rules were also liberalized in 1992, al-
lowing up to 20 percent of the time used for paid advertisements to be filled with
foreign-sourced material.
Local content regulations also require that 55 percent of a commercial television
station’s weekly broadcasts between the hours of 6:00 a.m. and midnight must be
dedicated to Australian-produced programs (the United States regrets that this re-
quirement was recently increased from 50 percent). Regulations governing Aus-
tralia’s pay-TV industry require that channels carrying drama must devote 10 per-
cent of their annual program budget to new Australian-produced content (though
they are not required to actually screen the programs produced, and many licensees
spend very little or nothing on production).
Labeling: Federal law requires that the country of origin be clearly indicated on
the front label of some types of products sold in Australia. Various other federal and
state labeling requirements are being reconsidered in light of compliance with GATT
obligations, utility and effect on trade. A new mandatory standard for foods pro-
duced using biotechnology came into effect in May 1999. The standard prohibits the
sale of food produced using gene technology, unless the food has been assessed by
the Australia New Zealand Food Authority (ANZFA) and listed in the standard. The
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Australia New Zealand Food Standards Council has directed ANZFA to require la-
beling for virtually all foods produced using biotechnology, and labeling regulations
have been in place since mid-1999. ANZFA was expected to release the protocol on
compliance with the Council’s directive in October, but has not yet done so. The re-
quirements would become mandatory 12 months from publication.
Commodity Boards: The export of wheat, rice, and sugar remains under the exclu-
sive control of commodity boards. The privatization of the Australian Wheat Board
(AWB) in July 1999 saw its export controls transferred to the Wheat Export Author-
ity, with veto rights over bulk export requests retained by the grower-owned former
subsidiary of the AWB, AWB (International) Ltd. A review of wheat export arrange-
ments is currently underway. While domestic marketing of barley has been deregu-
lated, the export monopoly administered by the Australian Barley Board has been
extended until 2001. Approximately 95 percent of dairy exports are made by the pri-
vate sector and about 5 percent by an arm of the Australian Dairy Corporation.
Australia terminated its export support payment scheme for dairy producers in
1995, replaced by an internal support program (since terminated). The Australian
government has made a structural adjustment package available to dairy producers
since June 30, 2000.
Sanitary and Phytosanitary Restrictions: Australia’s geographic isolation has al-
lowed it to remain relatively free of exotic diseases. Australia imposes extremely
stringent animal and plant quarantine restrictions. The WTO SPS agreement re-
quires, among other things, that Australia’s restrictions undergo a risk assessment
to ensure that any restrictions are science-based, rather than disguised non-tariff
barriers. Concerns remain with Australia’s restrictions on chicken (fresh, cooked
and frozen), pork, California table grapes, Florida citrus, stone fruit, apples, and
corn.
Investment: The government requires notification of (but normally raises no objec-
tions to) investment proposals by foreign interests above certain notification thresh-
olds, including: acquisitions of substantial interests in existing Australian busi-
nesses with assets of A$5 million or more (A$3 million for rural properties); new
businesses involving an investment of A$10 million or more; portfolio investments
in the media sector of 5 percent or more; all non-portfolio investments irrespective
of size; takeovers of Australian companies valued at either A$20 million or more,
or for more than 50 percent of the target company’s total assets; and direct invest-
ment of foreign governments irrespective of size. Investment proposals for entities
involving more than A$50 million in total assets are approved unless found contrary
to the national interest. Special regulations apply to investments in the banking sec-
tor, the media sector, urban real estate and civil aviation.
Divestment cannot be forced without due process of law. There is no record of
forced divestment outside that stemming from investments or mergers that tend to
create market dominance, contravene laws on equity participation, or result from
unfulfilled contractual obligations.
Government Procurement: Since 1991, foreign IT companies with annual sales to
the GOA of more than A$40 million have been expected to enter into the Partner-
ships for Development (PFD) scheme. Under a PFD, the headquarters of the foreign
firm agrees: to invest 5 percent of its annual local turnover on research and develop-
ment in Australia; to export goods and services worth 50 percent of imports (for
hardware companies) or 20 percent of turnover (for software companies); and to
achieve 70 percent local content across all exports within the seven-year life of the
PFD.
Recent changes to Australian government procurement policies have seen a sig-
nificant decentralization of purchasing procedures, with the introduction of En-
dorsed Supplier Arrangements (ESA). Companies wishing to supply IT products and
major office machines to the Australian government must gain endorsement under
the ESA. The industry development component of the new ESA requires evidence
of product development, investment in capital equipment, skills development and
service support, and sourcing services and product components, parts and/or input
locally. In addition, applicants must demonstrate performance in either exports, re-
search and development, development of strategic relationships with Australian or
New Zealand suppliers/customers, or participation in a recognized industry develop-
ment program.
The Australian Government maintains its commitment to source at least 10 per-
cent of its purchases from Australian small to medium size enterprises. The govern-
ment will continue to require tenderers to include industry development objectives
in tender documents, with model guidelines to be developed in consultation with in-
dustry.
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6. Export Subsidies Policies
Australia is a member of the WTO Agreement on Subsidies and Countervailing
Measures.
The coalition government has severely curtailed assistance schemes to Australian
industry as part of its fiscal consolidation program. Under the Export Market Devel-
opment Grants Scheme, the government gives grants to qualifying firms of up to
A$200,000 to assist in offsetting marketing costs incurred when establishing new
export markets. There are also schemes available for drawbacks of tariffs and sales
and excise taxes paid on the imported components of exported products.
7. Protection of U.S. Intellectual Property
Australia is a member of the World Intellectual Property Organization (WIPO),
and most multilateral IPR agreements, including: the Paris Convention for the Pro-
tection of Industrial Property; the Bern Convention for the Protection of Literary
and Artistic Works; the Universal Copyright Convention; the Geneva Phonogram
Convention; the Rome Convention for the Protection of Performers, Producers of
Phonograms, and Broadcasting Organizations; and the Patent Cooperation Treaty.
In August 2000 Australia took final action to implement the 1996 WIPO Copyright
and World Performances and Phonograms Treaties. The United States is concerned
over Australian’s limitations on its protection of test data for certain chemical enti-
ties, its removal of restrictions on parallel imports, and over copyright piracy,
among other issues.
Patents: Patents are available for inventions in all fields of technology (except for
human beings and biological processes relating to artificial human reproduction).
They are protected by the Patents Act (1990), which offers coverage for 20 years
subject to renewal. Trade secrets are protected by common law, such as by contract.
Design features can be protected from imitation by registration under the Designs
Act for up to 16 years (upon application).
Test Data: In 1999, the government passed legislation providing five years of pro-
tection of test data for the evaluation of a new active constituent for agricultural
and veterinary chemical products. No protection is provided for data submitted in
regard to new uses and formulations.
Trademarks and Copyrights: Australia provides TRIPS-compatible protection for
both registered and unregistered well-known trademarks under the Trademark Act
of 1995. The term of registration is ten years. Copyrights are protected under the
Copyright Act of 1968 for a term of the life of the author plus 50 years. Computer
programs can receive copyright protection, although the Parliament has enacted leg-
islation to permit decompilation. In recent years, the government has passed legisla-
tion removing parallel import protection for sound recordings and for goods whose
protection was based on the copyright of packaging and labeling. It is now proposing
to remove restrictions on books and computer software. Steadily growing parallel
importation of DVDs is of increasing concern to the motion picture industry. U.S.
copyright interests have stressed concern about the digital agenda bill that the Aus-
tralian government passed on August 17, 2000. The industry is worried that the law
would allow for unfettered worldwide trafficking in devices and services aimed at
hacking encryption, password protection and other technologies copyright owners
use to manage access to and use of their works. The Australian government has not
updated its laws to impose stiffer fines to discourage copyright piracy.
New Technologies: Infringement of new technologies does not appear to be a sig-
nificant problem.
8. Worker Rights
a. The Right of Association: Workers in Australia fully enjoy and practice the
rights to associate, to organize and to bargain collectively. In general, industrial dis-
putes are resolved either through direct employer-union negotiations or under the
auspices of the various state and federal industrial relations commissions. Australia
has ratified most major international labor organization conventions regarding
worker rights.
b. The Right to Organize and Bargain Collectively: Approximately 32 percent of
the Australian workforce belongs to unions. The industrial relations system operates
through independent federal and state tribunals; unions are currently fully inte-
grated into that process. Legislation reducing the powers of unions to represent em-
ployees and of the Industrial Relations Commission to arbitrate settlements was
passed by Federal Parliament in November 1996. Further changes in industrial re-
lations are under consideration in draft legislation currently before Parliament.
c. Prohibition of Forced or Compulsory Labor: Compulsory and forced labor are
prohibited by conventions that Australia has ratified, and are not practiced in Aus-
tralia.
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d. Minimum Age for Employment of Children: The minimum age for the employ-
ment of children varies in Australia according to industry apprenticeship programs,
but the enforced requirement in every state that children attend school until age
15 or 16 maintains an effective floor on the age at which children may be employed
full time.
e. Acceptable Conditions of Work: There is no legislatively-determined minimum
wage. An administratively-determined minimum wage exists, but is now largely out-
moded, although some minimum wage clauses still remain in several federal awards
and some state awards. Instead, various minimum wages in individual industries
are specified in industry ‘‘awards’’ approved by state or federal tribunals. Workers
in Australian industries generally enjoy hours, conditions, wages and health and
safety standards that are among the best and highest in the world.
f. Rights in Sectors with U.S. Investment: Most of Australia’s industrial sectors
enjoy some U.S. investment. Worker rights in all sectors are essentially identical in
law and practice and do not differentiate between domestic and foreign ownership.
Extent of U.S. Investment in Selected Industries—U.S. Direct Investment Position Abroad on an
Historical Cost Basis—1999
[Millions of U.S. Dollars]
Category Amount
Petroleum .......................................................................... 3,344
Total Manufacturing ......................................................... 7,646
Food and Kindred Products .......................................... 862
Chemicals and Allied Products .................................... 2,924
Primary and Fabricated Metals ................................... 471
Industrial Machinery and Equipment ......................... 693
Electric and Electronic Equipment .............................. 166
Transportation Equipment ........................................... 957
Other Manufacturing .................................................... 1,573
Wholesale Trade ............................................................... 2,146
Banking ............................................................................. 2,705
Finance/Insurance/Real Estate ........................................ 8,465
Services .............................................................................. 2,190
Other Industries ............................................................... 7,167
TOTAL ALL INDUSTRIES ............................................. 33,662
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
CHINA
Key Economic Indicators
[Billions of U.S. Dollars unless otherwise indicated]
1998 1999 2000
Income, Production and Employment 1
Nominal GDP 2 .......................................................... 960.8 986.9 1,065.7
Real GDP Growth (pct) 3 ........................................... 7.8 7.1 8.0
GDP by Sector: 4
Agriculture ............................................................. 172.7 174.1 173.8
Manufacturing ....................................................... 472.8 486.0 539.3
Services 5 ................................................................ 291.0 325.7 352.1
Government ............................................................ N/A N/A N/A
Per Capita GDP (US$) .............................................. 772 787 839
Labor Force (millions) ............................................... 705.0 711.6 717.8
Unemployment Rate (pct) 6 ....................................... 3.1 3.1 3.1
Money and Prices (annual growth):
Money Supply (M2) ................................................... 14.8 15.3 13.0
Consumer Price Inflation (pct) ................................. –0.8 –1.4 0.2
Exchange Rate (RMB/US$ avg.) .............................. 8.3 8.3 8.3
Balance of Payments and Trade:
Total Exports (FOB) 7 ............................................... 182.7 183.7 214.4
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Key Economic Indicators—Continued
[Billions of U.S. Dollars unless otherwise indicated]
1998 1999 2000
Exports to United States (customs) ..................... 71.2 81.9 92.8
Total Imports CIF ..................................................... 142.4 140.2 197.8
Imports from United States FAS ......................... 14.3 15.0 17.0
Trade Balance ............................................................ 40.3 43.5 16.6
Balance with United States .................................. 56.9 66.9 75.8
External Public Debt 8 .............................................. 146.0 151.8 152.0
Fiscal Deficit/GDP (pct) ............................................ 3.5 2.8 3.0
Current Account Surplus/GDP (pct) ........................ 3.1 3.0 2.3
Debt Service Payments/Export (pct) ........................ 12.6 9.6 9.0
Debt Service Payments/GDP (pct) ........................... 2.4 2.2 2.0
Gold and Forex Reserves ...................................... 145.0 154.7 163.0
Aid from United States ............................................. 0 0 0
Aid from Other Sources ............................................ 0.6 0.6 0.6
1 All income and production figures are converted into dollars at the exchange rate of RMB 8.3 = US$1.00.
Figures are in US$billions unless otherwise stated.
2 GDP figures for year 2000 are estimates based on data available in October 2000.
3 Official growth rate published by State Statistical Bureau based on constant renminbi (RMB) prices using
1978 weights.
4 Production and net exports are calculated using different accounting methods and do not tally to total
GDP. Agriculture includes forestry and fishing; manufacturing includes mining.
5 Available Chinese GDP data do not disaggregate services provided by the government from overall serv-
ices.
6 ‘‘Official’’ urban unemployment rate for China’s approximately 200 million urban workers; agricultural la-
borers are assumed to be totally employed in China’s official labor data. Many economists believe the real
rate of urban unemployment is much higher.
7 U.S. Department of Commerce for U.S.-China bilateral trade data; PRC Customs for Chinese global trade
data; Embassy estimate for full-year 2000 trade.
8 Includes loans from foreign government, loans from international financial institutions, international com-
mercial loans, and other unspecified international liabilities.
Sources: China Statistical Bureau Yearbook; People’s Bank of China Quarterly Statistical Bulletin; U.S.
Department of Commerce Trade Data; Embassy estimates.
1. General Policy Framework
For two decades, in the aftermath of a quarter-century of ‘‘politics in command’’
as the failed guiding principle of economic development, China has pursued policies
designed to achieve rapid growth and higher living standards. During this period,
China has made a gradual transformation from a centrally planned, socialist econ-
omy toward a more market-based economy. Though state-owned industry remains
dominant in key sectors, the government has ‘‘privatized’’ many small and medium
state-owned enterprises (SOEs) and has allowed the non-state sector, including pri-
vate entrepreneurs, increasing scope for economic activity. The International Mone-
tary Fund (IMF) estimates that the non-state sector accounts for three-fourths of
industrial output, 50 to 60 percent of Gross Domestic Product (GDP), and about 60
percent of nonagricultural employment.
China weathered the Asia Financial Crisis well. Most analysts expect GDP
growth to be about eight percent this year. As in the past, exports were the primary
engine for China’s economic growth. For the January-August 2000 period, they were
35 percent greater than for the same period in 1999. The rapid export expansion
reflected in part the recovery from the Asia Financial Crisis of China’s Asian mar-
kets. The United States remains China’s most important market; it takes more than
40 percent of China’s total exports. Imports also increased rapidly. By value, they
were up 39 percent in JanuaryAugust 2000 (year-on-year), due largely to the effect
of higher prices for petroleum and non-ferrous metals. China’s accession to the
World Trade Organization (WTO) will likely further boost trade and accelerate Chi-
na’s integration into the world trading system.
To reverse the slowdown in economic growth, especially since 1998, the Chinese
government has used deficit-financed fiscal stimulus to encourage domestic eco-
nomic expansion. This program has contributed an estimated 1.5–2.0 percentage
points to GDP annually. In August 2000 the Chinese government announced a $6
billion treasury bond issue, primarily to finance additional infrastructure projects
and to ensure the completion of projects already underway. Reflecting the effects of
the fiscal stimulus package and major increases in 1999 in social welfare expendi-
ture and civil service salaries, urban consumer spending picked up somewhat in
2000. Supply of many industrial and consumer products greatly exceeds demand.
Chinese policymakers, who for years made fighting inflation a major macroeconomic
target, spent the last two years combating deflation. In 2000 many prices, especially
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for food and consumer goods, continued to fall. Charges for services and fuel showed
substantial increases.
The Chinese government recognizes that major structural reform is needed in
three key areas: it must reform the SOEs, completely overhaul the financial system,
and create and fund a social safety net. SOE earnings rose in 2000, although this
appears to be largely the result of state-owned petroleum industry profits from high-
er oil prices, increased SOE exports, and a government-engineered reduction in in-
terest paid by SOEs on bank debt. The large stock of non-performing loans to SOEs
remains a critical obstacle to financial reform. Bank loans to non-agricultural SOEs
accounted for about 60 percent of total outstanding short-term lending in 1999. The
four state-owned, commercial banks that dominate China’s financial system estab-
lished asset management companies (AMCs) in 1999 to assume the burden of the
non-performing loans. By September 2000 the AMCs had done little to restructure
or to liquidate their holdings. The failure of the Guangdong Trust and Investment
Corporation (GITIC) in late 1998 prompted the Chinese government to rein in the
operations of more than 200 other trust and investment companies and toughen the
supervision of domestic banks, securities firms, insurance companies, and other fi-
nancial institutions. Stock and bond markets are immature. Reform of the financial
system will help allocate more efficiently China’s huge pool of domestic savings and
fund creation of pension, unemployment, and health care systems.
China enjoys large inflows of foreign capital. Lured by a market with over one
billion potential consumers, foreign companies have made China the world’s second
largest destination for foreign direct investment (FDI). New inflows of FDI slumped
10 percent in 1999, to total $41 billion. In the January-October 2000 period, contrac-
tual foreign investment was $43 billion, up 37 percent over the corresponding period
in 1999. Note that realized FDI is substantially lower than contractual totals re-
ported by Chinese authorities.
2. Exchange Rate Policies
Foreign-Invested Enterprises (FIEs) and authorized Chinese firms have generally
enjoyed liberal access to foreign exchange for trade-related and approved investment
related transactions. FIEs may set up foreign currency deposits for trade and remit-
tances. Since 1997, Chinese firms earning more than $10 million a year in foreign
currency have been allowed to retain in foreign currency up to 15 percent of their
receipts. The Asia-wide economic slowdown and growing evidence of unauthorized
capital outflows prompted the government to tighten documentation requirements
in mid-1998. U.S. firms reported that the extra delays caused by these measures
had for the most part ended by mid-1999. China introduced currency convertibility
for current account (trade) transactions in December 1996 (in accord with the IMF
charter’s Article VIII provisions). Capital account liberalization has been postponed
indefinitely.
Chinese authorities describe the exchange rate as a ‘‘managed float.’’ For the past
three years, it has behaved like a rate pegged to the dollar, with a trading range
of ±0.3 percentage points; since 1996 the renminbi (RMB) has traded consistently
at about RMB 8.3 per dollar. China uses the RMB/dollar exchange rate as the basic
rate and sets cross rates against other currencies by referring to international mar-
kets. China’s central bank, the People’s Bank of China (PBOC), continues to set in-
terest rates on all deposits and loans in domestic currency. In September 2000, how-
ever, the authorities lifted controls on interest rates on all foreign currency loans
and on foreign currency deposits in excess of $3 million. A newly established asso-
ciation of Chinese banks, moreover, was granted the authority to set interest rates
on foreign currency deposits under the $3 million level. Following several years of
successive reductions, interest rates on Chinese currency loans and deposits are sig-
nificantly below U.S. levels. As a result, ‘‘black market’’ trading continues to be a
small albeit regular feature of the Chinese system. Forward rates are available in
the small, offshore market.
3. Structural policies
A. Investment
China has historically attempted to guide new foreign investment to ‘‘encouraged’’
industries. Over the past five years, China has implemented new policies intro-
ducing new incentives for investments in high-tech industries and in the central and
western, less developed parts of the country. In 2000 China published revised lists
of sectors in which foreign investment would be encouraged, restricted or prohibited.
Regulations relating to the encouraged sectors were designed to direct FDI to areas
in which China could benefit from foreign assistance or technology, such as in the
construction and operation of infrastructure facilities. Policies relating to restricted
and prohibited sectors were designed to protect domestic industries for political, eco-
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nomic or national security reasons. The number of restricted industries—currently
including many service industries such as banking, insurance, and distribution—
should decrease as China opens its service sector upon accession to the WTO. The
production of arms and the mining and processing of certain minerals remain pro-
hibited sectors.
Foreign-Invested Enterprises (FIEs) continue to report being forced to accept ex-
port performance requirements in investment contracts; they say that failure to
meet these requirements can result in loss of licenses for foreign exchange or con-
tract termination. Similarly, some firms report being forced to accept contracts man-
dating increased local content. Chinese government agencies strongly encourage
firms under their control to ‘‘buy Chinese.’’
B. Industrial Policies
In 1994, China issued a ‘‘Framework Industrial Policy for the 1990s.’’ The frame-
work included plans to issue policies for the key automotive, telecommunications,
transportation, machinery, electronics, high technology, and construction sectors. Of
these, only the automotive industrial policy has been published to date and is cur-
rently under extensive revision. The delay stems from the Chinese government’s rec-
ognition that these policies must be reconciled with the obligations China will incur
when it accedes to the WTO.
C. China EXIM Financing
Regulations promulgated in July 1995 established guidelines for buyer’s and sell-
er’s credit programs operated by the Export and Import Bank of China (China
EXIM). China EXIM announced in early 1999 that it would expand it program to
finance the export of mechanical and electrical products, particularly to Africa and
South East Asia.
D. Price Controls
The Chinese government, as part of its comprehensive reform of the economy, is
committed to gradually phasing out remaining price controls. It nevertheless con-
tinues to influence prices of sensitive goods such as grain. To curb surplus produc-
tion in 2000, the government allowed grain and cotton prices to fall by more than
20 percent, bringing domestic prices closer to international levels. China maintains
discriminatory pricing practices with respect to some services and inputs offered to
foreign investors in China. On the other hand, foreign investors benefit from invest-
ment incentives, such as tax holidays and grace periods, which allow them to reduce
substantially their tax burden.
E. Taxation
China’s accession to the WTO is likely to accelerate the phaseout of its two-tier
tax system for domestic and foreign enterprises. Domestic enterprises have long re-
sented rebates and other tax benefits enjoyed by foreign-invested firms. The move
toward national treatment will mean the gradual elimination of special tax breaks
enjoyed by many foreign investors. In addition, more sophisticated collection meth-
ods should help reduce loopholes for all market participants.
As part of a national campaign to standardize tax treatment and increase collec-
tion rates, the State Administration of Taxation began work on a planned unifica-
tion of the tax system in 1998. China’s weak trade performance during most of 1999
and questions relating to China’s WTO obligations have delayed the completion of
this exercise. The Chinese government, in fact, increased rebates of value-added
taxes (VAT) for selected exports twice in 1999. Despite the 1999 reprieve, State Ad-
ministration of Taxation officials plan eventually to phase out VAT rebates to in-
crease tax revenues.
F. A Growing Concern for Transparency
It is increasingly easy to find information about economic and trade regulations
in the print and electronic media. Economic newspapers routinely carry the text of
government policies and regulations; MOFTEC, for example, has its own website.
Access to information, nevertheless, continues to be a problem. Chinese ministries
routinely implement policies based on ‘‘guidance’’ or ‘‘opinion’’ that are not available
to foreign firms. Officials are frequently unwilling to consult with Chinese and for-
eign industry representatives before new regulations are implemented. The opaque
nature of customs and other government procedures also complicate the ability of
businesses to take full advantage of opportunities in China.
4. Debt Management Policies
As of June 2000, China’s external debt stood at $149 billion, according to official
Chinese data. Given China’s export performance, investment inflows, and high level
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27
of foreign exchange reserves (nearly $160 billion at the end of June 2000), the debt
burden seems likely to remain within manageable limits.
China’s local bond market is in its infancy, with virtually no secondary market.
This prevents the central bank from effectively regulating the money supply
through indirect means. Interest rates on government bonds are fixed at about one
percentage point above the comparable bank deposit rates, which are also fixed. As
the government has increased its deficit, the percentage of the budget devoted to
debt servicing has increased to about 17 percent of total expenditures (based on the
Finance Minister’s March 2000 annual budget report to China’s national legisla-
ture).
5. Aid
The United States has no development assistance program in China. However,
the United States has provided occasional disaster-relief assistance to China to sup-
port flood relief and other humanitarian efforts in recent years. In 1999–2000 the
United States donated 200,000 tons of grain to the World Food Program in China.
In 1999 it donated $500,000 to the International Federation of the Red Cross to as-
sist in flood relief efforts in the Yangtze River Valley. In addition, the United States
operates a modest Peace Corps program, called the Friendship Volunteers, which of-
fers English language and environmental protection training. China is a major re-
cipient of assistance from other countries and multilateral donors. China’s largest
bilateral aid donor is Japan. Multilateral assistance includes programs operated by
the World Bank; the World Food Program; United Nations Development Program
and other United Nations affiliated agencies and programs; and the Asian Develop-
ment Bank. Domestic and international non-governmental organizations have also
expanded their presence in recent years, thanks in part to a 1998 law giving them
official status.
6. Significant Barriers to U.S. Exports
China concluded a bilateral market access agreement with the United States on
November 15, 1999 but is not yet a member of the WTO. Once it becomes a mem-
ber, it must fulfill its commitments to reduce substantially existing barriers to the
entry into China of U.S. goods and services. Meanwhile, in an effort to cope with
a slowing economy and relatively weak external demand, China continued its unilat-
eral reform efforts in 1999 and 2000. Some of the policies adopted will improve mar-
ket access for U.S. goods and services. For example, a huge expansion in the num-
ber of firms with trading rights, reduction in the number of products subject to im-
port quotas, and an improved system of distribution rights will all benefit foreign
firms.
Despite this progress, other measures have effectively closed existing markets for
imported goods and services. Non-tariff barriers to trade and trade-distorting meas-
ures persist. Nontariff barriers (NTBs) include quotas, tariff rate quotas, import li-
censing, import substitution and local content policies, and unnecessarily restrictive
certification and quarantine standards. Extra-legal trade barriers, such as export
performance requirements, also distort trade; all of these nontariff barriers to trade
will have to be eliminated when China accedes to the WTO.
In several cases, such as the initial public draft of encryption regulations intro-
duced in late 1999, Chinese ministries tried to address national security issues in
ways that resulted in the creation of new barriers to trade. The vague wording of
many Chinese laws and regulations often leads to conflicts with other laws or broad-
er trade and investment policies. Nonspecific language also makes it difficult for
companies and individuals to be certain they are obeying the provisions of a given
law.
Regulatory initiatives introduced since the completion of the November 1999 bilat-
eral market access agreement on China’s WTO accession appear to limit access for
some goods and services. Examples of these problems include the following.
Technical Barriers to Trade: For manufactured goods, China requires quality li-
censes before granting import approval, with testing based on standards and speci-
fications often unknown or unavailable to foreigners and not applied equally to do-
mestic products. China continues to operate a dual inspection system that differen-
tiates between imported goods and those produced domestically. This practice vio-
lates the principle of national treatment. A further complication is that imported
products are sometimes required to be tested both at the port of entry by China In-
spection and Quarantine (CIQ) and by the domestic testing authority, resulting in
delays and increased costs for the importer.
Chain Stores: The U.S.-China agreement on China’s WTO accession contains pro-
vision for the gradual liberalization of wholesale, retail, franchising, and direct sales
services over three years. The language excepts large department stores and chain
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28
stores with over 30 outlets. New chain store regulations appear to call these com-
mitments into question by greatly broadening the definition of what constitutes a
chain store.
Pharmaceuticals: The Chinese government banned the import of nine generic
medicines, including several varieties of antibiotics, pain relievers, and Vitamin C,
in mid 1999 in an effort to control falling prices in the domestic market. In late 1998
it implemented price caps on pharmaceuticals, claiming it was doing so to contain
health care costs. The regulations may drive some multinationals and bulk pharma-
ceutical exporters out of the $12-billion Chinese pharmaceutical market and push
others into the red. The price caps are calculated only on the basis of each drug’s
production costs, ignoring research spending and other shared overheads.
7. Export Subsidies
China abolished direct subsidies for exports on January 1, 1991. Nonetheless, ex-
ports of agricultural products, particularly corn and cotton, still receive direct export
subsidies. China agreed to stop such subsidies once it becomes a member of the
WTO. There continue to be reports that some manufactured exports benefit from in-
direct subsidies through preferential access to or access at below market rates to
inputs such as energy, raw materials or labor. Some companies also may enjoy de
facto indirect subsidies by not repaying their bank loans.
8. Protection of U.S. Intellectual Property
China is a member of the World Intellectual Property Organization (WIPO) and
is a signatory to the Paris Convention for the Protection of Intellectual Property,
the Bern Convention for the Protection of Literary and Artistic Works, the Uni-
versal Copyright Convention, the Patent Cooperation Treaty, and the Madrid Pro-
tocol. China has also committed to bringing its laws and regulations on the protec-
tion of intellectual property rights (IPR) into full compliance with the WTO agree-
ment on Trade-Related Intellectual Property (TRIPS) at the time of its accession to
WTO. A new Patent Law was completed in August 2000, and new draft Trademark
and Copyright Laws are currently under discussion in interagency meetings.
After signing the U.S.-China agreement on the protection of intellectual property
rights in February 1995, and the June 1996 agreement on procedures for ensuring
implementation of the bilateral, China made progress in implementing IPR regula-
tions and improving enforcement and education. The United States took China off
Special 301 lists in 1996, but continues to watch China under Section 306 of the
Trade Act, which allows the United States to monitor China’s compliance with its
obligations. If China is found wanting in its IPR regime, the United States can
begin a fast-track examination, which can result in penalties.
China revised its laws to provide criminal penalties for IPR violations. The United
States, nevertheless, remains concerned that penalties imposed by Chinese courts
are insufficient to deter violations. Some U.S. companies estimate losses from Chi-
nese counterfeiting equal 15 to 20 percent of total sales in China. One U.S. con-
sumer products company estimates that it loses $150 million annually due to coun-
terfeiting. The destructive effect of counterfeiting has discouraged additional direct
foreign investment and threatened the long-term viability of some U.S. business op-
erations in China. The inferior quality of counterfeit products also creates serious
health and safety risks.
China’s State Council, the highest executive organ of the government, issued a de-
cree in 1999 admonishing Chinese government agencies to purchase only legal com-
puter software. Nevertheless, end-user piracy of computer software continues to cost
U.S. companies millions of dollars. A PRC study on China’s software industry pub-
lished in September 2000 identified piracy as the major obstacle to the development
of China’s software industry. Regulations on the use of copyright agents by foreign
companies have not yet been finalized; this effectively prevents foreign companies
from using agents to register copyrights. Foreigners registering trademarks face a
shortage of agents authorized to accept trademark applications from foreign compa-
nies. The lack of clear procedures to protect unregistered well-known trademarks
makes it difficult to oppose or cancel well-known marks registered by an unauthor-
ized party.
9. Worker Rights
a. The Right of Association: China’s constitution provides for ‘‘freedom of associa-
tion,’’ but in practice this provision does not entitle workers to organize freely. The
Trade Union Law states that workers who wish to form a union at any level must
receive approval from a higher-level trade organization. Approved trade unions are
legally required to join the All-China Federation of Trade Unions (ACFTU), a na-
tional umbrella organization controlled by the Communist Party. Independent trade
unions are illegal. Since China’s signing of the International Covenant on Economic,
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29
Social, and Cultural Rights in 1997, several labor activists have petitioned the gov-
ernment to establish free trade unions, as allowed under the covenant. China has
not yet ratified the Covenant nor approved any of these petitions to date.
b. The Right to Organize and Bargain Collectively: The 1995 National Labor Law
permits collective bargaining for workers in all types of enterprises. The law also
provides for workers and employers to sign individual as well as collective contracts.
Collective contracts are to be negotiated between ACFTU or worker representatives
and management and specify such matters as working conditions, wage distribution,
and hours of work. Individual contracts are then to be drawn up in line with the
terms of the collective contract. According to the ACFTU, 72 million workers in over
310,000 enterprises held contracts that were negotiated in this fashion as of June
1999.
c. Prohibition of Forced or Compulsory Labor: Forced labor in penal institutions
is a problem. The Chinese government employs judicial procedures to sentence
criminals to prisons and reform-through-labor facilities. The government also main-
tains a network of reeducation-through-labor camps, to which persons are sen-
tenced, without judicial review, through administrative procedures. Inmates of re-
education-through-labor camps generally are required to work. Most reports con-
clude that work conditions in the penal system’s light manufacturing facilities are
similar to those in ordinary factories, but conditions on farms and in mines can be
harsh.
d. Minimum Age of Employment of Children: China’s National Labor Law forbids
employers to hire workers under 16 years of age and stipulates administrative re-
view, fines, and revocation of licenses for businesses that hire minors. Good public
awareness, a surplus of legal adult workers, and nearly universal primary schooling
have reduced incentives to hire child workers. A national government campaign in
mid-2000 against women and child trafficking, however, revealed that child labor
was perhaps a more significant problem than previously thought. The International
Labor Organization (ILO) and UNICEF have been unable to collect statistics on
child labor, but they do not believe the problem is systemic. Some Chinese aca-
demics maintain that child labor problems exist in agricultural and mining areas,
where it is sometimes difficult to enforce labor law and where, in the agricultural
areas in particular, families, including children, have always labored alongside one
another during the critical planting and harvesting seasons.
e. Acceptable Conditions of Work: The Labor Law codifies many of the general
principles of labor reform, setting out provisions on labor contracts, working hours,
wages, skill development and training, dispute resolution, legal responsibility, su-
pervision, and inspection. The law does not set a national minimum wage, but al-
lows local governments to determine their own minimum wage standards. China
has a 40-hour workweek, excluding overtime, and a mandatory 24-hour rest period
per week. The Chinese government claims to have implemented in over 600 cities
a system that ensures disbursement of unemployment benefits to laid-off workers
and basic living stipends for the poorest urban residents. In September 1999 the
government raised both unemployment benefits and basic living stipends by thirty
percent, despite reports that some cities had insufficient funds to provide these enti-
tlements even before the hike.
Every Chinese work unit must designate a health and safety officer, and the ILO
has established a training program for these officers. China’s Trade Union Law rec-
ognizes the right of unions to ‘‘suggest that staff and workers withdraw from sites
of danger’’ and to participate in accident investigations. According to statistics re-
leased in 1999 by the Ministry of Labor and Social Security, industrial accidents de-
clined 16 percent in 1998 to 15,372. Deaths stemming from such accidents likewise
declined to 16 percent to 14,660. The improvement in industrial safety was due
largely to a national campaign to shut down illegal mines, which perennially ac-
count for more than half of all industrial accidents.
f. Rights in Sectors with U.S. Investment: Worker rights practices in sectors with
U.S. investment do not appear to vary substantially from those in other sectors of
the economy. Unlike their Chinese counterparts, however, a number of U.S.-invested
businesses have voluntarily adopted codes of conduct that provide for independent
inspections of working conditions in their facilities.
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Extent of U.S. Investment in Selected Industries—U.S. Direct Investment Position Abroad on an
Historical Cost Basis—1999
[Millions of U.S. Dollars]
Category Amount
Petroleum .......................................................................... 991
Total Manufacturing ......................................................... 4,789
Food and Kindred Products .......................................... 150
Chemicals and Allied Products .................................... 259
Primary and Fabricated Metals ................................... 203
Industrial Machinery and Equipment ......................... 946
Electric and Electronic Equipment .............................. 2,343
Transportation Equipment ........................................... 123
Other Manufacturing .................................................... 765
Wholesale Trade ............................................................... 201
Banking ............................................................................. 69
Finance/Insurance/Real Estate ........................................ 784
Services .............................................................................. 260
Other Industries ............................................................... 673
TOTAL ALL INDUSTRIES ............................................. 7,766
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
HONG KONG
Key Economic Indicators
[Billions of U.S. Dollars unless otherwise indicated]
1998 1999 2000 1
Income, Production and Employment:
Nominal GDP 2 .......................................................... 161.8 158.1 166.0
Real GDP Growth (pct) ............................................. –5.3 3.1 8.5
GDP by Sector:
Agriculture ............................................................. 0.2 N/A N/A
Manufacturing ....................................................... 9.1 N/A N/A
Services ................................................................... 127.7 N/A N/A
Government ............................................................ 15.1 15.6 15.7
Per Capita GDP (US$) .............................................. 24,352 23,530 24,707
Labor Force (000s) ..................................................... 3,306 3,343 3,380
Unemployment Rate (pct) ......................................... 4.7 6.3 4.8
Money and Prices (annual percentage growth):
Money Supply (M2) 3 ................................................. 11.8 8.1 9.0
Consumer Price Inflation (pct) ................................. 2.8 –4.0 –3.5
Exchange Rate (HK$/US$)
Official .................................................................... 7.75 7.77 7.78
Balance of Payments and Trade:
Total Exports FOB 4 .................................................. 172.8 172.9 197.1
Exports to United States 5 .................................... 10.5 10.5 11.7
Total Imports CIF ..................................................... 183.2 178.6 207.1
Imports from United States 5 ................................ 12.9 12.6 14.4
Trade Balance ............................................................ –10.4 –5.7 –10.0
Balance with United States 5 ................................ –2.4 –2.1 –2.7
External Public Debt ................................................. 0 0 0
Fiscal Balance/GDP (pct) .......................................... –2.5 0.8 –0.5
Current Account Balance/GDP (pct) ........................ 1.1 5.4 4.9
Debt Service Payments/GDP (pct) ........................... 0 0 0
Gold and Foreign Exchange Reserves (end-of-pe-
riod) 6 ...................................................................... 89.6 96.3 101.8
Aid from United States ............................................. 0 0 0
Aid from All Other Sources ...................................... 0 0 0
1 Estimates based on monthly data through August 2000.
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2 Expenditure-based GDP estimates.
3 Money supply of Hong Kong dollars and foreign currencies.
4 Of which domestic exports (as opposed to re-exports) constituted14.0 percent (1998), 12.6 percent (1999)
and 12.0 percent (2000 estimate based on data through August).
5 Source: U.S. Department of Commerce and U.S. Census Bureau; exports FAS, imports customs basis;
2000 figures are estimates based on data available through July 2000. Hong Kong merchandise trade in-
cludes substantial re-exports (mainly from China) to the United States, which are not included in these fig-
ures.
6 The Land Fund was included in the foreign exchange reserves effective July 1, 1997.
Source: Census and Statistics Department.
1. General Policy Framework
Since becoming a Special Administrative Region of the People’s Republic of China
on July 1, 1997, Hong Kong has continued to manage its own financial and eco-
nomic affairs, its own currency, and its independent role in international economic
organizations and agreements.
The Hong Kong Government generally pursues policies of noninterference in com-
mercial decisions, low and predictable taxation, government spending increases
within the bounds of real economic growth, competition subject to transparent laws
(albeit without antitrust legislation) and consistent application of the rule of law.
With few exceptions, the government allows market forces to set wages and prices,
and does not restrict foreign capital flows or investment. It does not impose export
performance or local content requirements, and allows free repatriation of profits.
Hong Kong is a duty-free port, with few barriers to trade in goods and services.
Until 1998, the government regularly ran budget surpluses and thus has amassed
large fiscal reserves. The corporate profit tax is 16 percent and personal income is
taxed at a maximum of 15 percent. Property is taxed; interest, royalties, dividends,
capital gains and sales are not.
Because monetary policy is tied to maintaining the nominal exchange rate linked
to the U.S. dollar, Hong Kong’s monetary aggregates have effectively been demand-
determined. The Hong Kong Monetary Authority, responding to market pressures,
occasionally adjusts liquidity through interest rate changes and intervention in the
foreign exchange and money markets.
The Asian financial crisis provoked a sharp economic downturn in 1998 and the
first half of 1999, but Hong Kong’s economic fundamentals remained strong, with
a stable banking system, prudent fiscal policy and massive dollar reserves. In Au-
gust 1998 the government made what it describes as a ‘‘one-time’’ intervention in
the stock, futures, and currency markets (spending about $15 billion) to defend
against what it believed were market manipulation efforts by financial market play-
ers. In October 1999 the government began to divest itself of the shares it acquired
in this intervention through sales to the public. By mid-2000 the economy was well
into an export-driven recovery, but unemployment remained high by Hong Kong
standards and concerns remained about the possible impact of an economic slow-
down in the United States, which is Hong Kong’s most important export market
after China.
In July 2000 Hong Kong’s Trade and Industry Bureau was reorganized to support
the government’s strategy of technology-based development. The creation of a new
Innovation and Technology Commission reflects the government’s increasing willing-
ness to fund technology investment and encourage commercial applications. At the
same time, the government created Invest Hong Kong, a new agency under the re-
named Commerce and Industry Bureau, to actively promote inward investment.
2. Exchange Rate Policies
The Hong Kong dollar is linked to the U.S. dollar at an exchange rate of
HK$7.8 = US$1.00. The link was established in 1983 to encourage stability and in-
vestor confidence in the run-up to Hong Kong’s reversion to Chinese sovereignty in
1997. PRC officials have supported Hong Kong’s policy of maintaining the link. In
September 2000 the Hong Kong Monetary Authority completed phase two of the im-
plementation of Hong Kong’s U.S. dollar payment system, which allows local firms
to achieve real-time settlement of U.S. dollar transactions. When completed in De-
cember 2000, the system will reinforce monetary stability.
There are no foreign exchange controls of any sort. Under the linked exchange
rate, the overall exchange value of the Hong Kong dollar is influenced predomi-
nantly by the movement of the U.S. dollar against other major currencies. The price
competitiveness of Hong Kong exports is therefore affected by the value of the U.S.
dollar in relation to third country currencies.
3. Structural Policies
The government does not have pricing policies, except in a few sectors such as
energy, which is partially regulated. Even in those controlled areas, the government
continues to pursue sector-by-sector liberalization. Hong Kong’s personal and cor-
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porate tax rates remain low and it does not impose import or export taxes. Since
1996, Hong Kong has deregulated most interest rates. In July 2000 the Monetary
Authority removed the remaining interest rate cap on time deposits with maturity
of less than seven days. The interest rate cap on savings and current accounts will
be removed in July 2001. Consumption taxes on tobacco, alcoholic beverages, and
some fuels constrain demand for some U.S. exports. Hong Kong generally adheres
to international product standards.
Hong Kong’s lack of antitrust laws has allowed monopolies or informal cartels,
some of which are government-regulated, to dominate certain sectors of the econ-
omy. These informal cartels can use their market position to block effective competi-
tion indiscriminately but do not discriminate against U.S. goods or services in par-
ticular.
4. Debt Management Policies
The Hong Kong government has minuscule public debt. Repeated budget sur-
pluses have meant the government has not had to borrow. To promote the develop-
ment of Hong Kong’s debt market, the government launched an exchange fund bills
program with the issuance of 91-day bills in 1990. Since then, maturities have
gradually been extended. Five-year notes were issued in October 1993, followed by
7-year notes in late 1995 and 10-year notes in 1996. In March 1997 the Hong Kong
Mortgage Corporation was set up to promote the development of the secondary
mortgage market. The Corporation is 100 percent owned by the government through
the Exchange Fund. The Corporation purchases residential mortgage loans for its
retained portfolio in the first phase, followed by packaging mortgages into mortgage-
backed securities for sale in the second phase.
In October 2000 the government launched a partial privatization of the Mass
Transit Railway Corporation to the general public in Hong Kong and domestic and
international professional and institutional investors. The Initial Share Offer of this
first-ever Hong Kong government privatization raised about US$1.3 billion.
Hong Kong does not receive bilateral or multilateral assistance.
INDONESIA
Key Economic Indicators
[Billions of U.S. Dollars unless otherwise indicated]
1998 1999 2000
Income, Production and Employment: 1
Nominal GDP ............................................................ 94 142 156
Real GDP Growth (pct) ............................................. –13.2 0.3 4.0
GDP by Sector:
Agriculture ............................................................. 18.4 27.8 28.0
Manufacturing ....................................................... 23.4 36.2 39.0
Services ................................................................... 35.7 56.9 58.0
Government ............................................................ 4.1 7.2 7.6
Per Capita GDP (US$) .............................................. 465 682 760
Labor Force (millions) ............................................... 92.6 94.8 96.5
Unemployment Rate (pct) ......................................... 4.7 6.3 6.2 2
Money and Prices (annual percentage growth):
Money Supply (M2) (pct) .......................................... 62.3 8.8 12.1
Consumer Price Inflation (pct) ................................. 75.0 2.0 7.6
Exchange Rate (Rupiah/US$ annual average) ........ 10,014 7,855 8,290
Balance of Payments and Trade:
Total Exports FOB .................................................... 50.4 48.6 61.1
Exports to United States ....................................... 9.3 9.5 9.7
Total Imports CIF ..................................................... 27.3 24.0 35.5
Imports from United States .................................. 2.3 2.0 2.5
Trade Balance ............................................................ 23.1 24.6 25.6
Balance with United States .................................. 7.0 7.5 7.2
External Public Debt ................................................. 71.4 80.7 91.2
Debt Service Payments/GDP (pct) ........................... 7.6 6.5 6.9
Current Account Balance/GDP (pct) ........................ 3.9 4.1 4.8 3
Fiscal Deficit/GDP (pct) ............................................ 2.2 6.8 4.8 3
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Key Economic Indicators—Continued
[Billions of U.S. Dollars unless otherwise indicated]
1998 1999 2000
Gold and Foreign Exchange Reserves (end-of-pe-
riod) ......................................................................... 23.5 27.1 27.2
Aid from United States (millions of US$) ............... 135 139 205
Aid from All Other Sources ...................................... 5.2 7.8 4.2 4
1 2000 GDP figures are GOI estimates. Annual variations partly due to exchange rate fluctuations.
2 Official GOI Estimate of open unemployment. Does not measure underemployment.
3 Indonesian Fiscal Year.
4 2000 number is amount pledged (Apr - Dec)
Sources: Government of Indonesia, U.S. Department of Commerce (for trade with U.S.), IMF (exchange
rates), U.S. Agency for International Development (for bilateral assistance).
1. General Policy Framework
Three years after the Asian financial crisis devastated the Indonesian economy
and precipitated the fall of President Soeharto, Indonesia’s reform process remains
incomplete. The country is caught between the remnants of the old autocracy and
full democracy and open markets. The high hopes for rapid, all-encompassing
change that accompanied the October 1999 elections of President K.H.
Abdurrahman Wahid and Vice President Megawati Soekarnoputri have faded.
Indonesia is the world’s fourth largest country and the anchor of Southeast Asia
politically and economically. The country has a strategic location, a large labor force
earning relatively low wages and abundant natural resources. The government faces
daunting economic problems that must be addressed if it is to regain the economic
stability and growth the country enjoyed until 1997. Urgent tasks include com-
pleting the reform and democratization of government institutions; resolution of cur-
rent and potential conflicts (Aceh, West Timor, Moluccas, Papua); fiscal and political
decentralization; establishment of civilian control over the military; reform of the
justice sector, including bringing Soeharto-era criminals to justice; eradicating cor-
ruption; maintaining and advancing economic policy deregulation; and improving
the investment climate.
The IMF-supported stabilization and recovery program has been the overriding
fact of economic life in Indonesia since November 1997. However, the government
has often been slow to implement its commitments. For example, although the Indo-
nesian Bank Restructuring Agency (IBRA) has completed the recapitalization of the
banking system, it has been slow to dispose of assets acquired in the debt-restruc-
turing process and to move against uncooperative debtors.
Despite the continued policy disarray, Indonesia’s real economy began to recover
in 2000, led largely by a release of pent-up consumer demand and surging exports.
In the first seven months of 2000, Indonesia’s exports were up 34 percent over the
same period of 1999. Observers expect overall real GDP growth to reach four per-
cent in 2000, a marked improvement over the zero growth in 1999, but output is
still below its immediate pre-crisis level. The country retains its solid export founda-
tion of oil, gas, minerals and agricultural commodities such as coffee, tea, rubber,
timber, palm oil and shrimp. Regions such as Sumatra and Sulawesi that have
strong, agricultural commodity-based economies survived the crisis with only minor
disruptions. Indonesian exports to the United States have remained steady through-
out the crisis at more than $9 billion annually. Imports from the United States,
which fell by almost half between 1997 and 1998, have begun to recover and should
reach $2.5 billion in 2000.
The Indonesian government has historically maintained a ‘‘balanced’’ budget: ex-
penditures were covered by the sum of domestic revenues and foreign aid and bor-
rowing, without resort to domestic borrowing. Often the government ended the year
with a slight surplus. This remains the government’s long-term goal. However, the
financial crisis, especially the bank recapitalization program, has placed a heavy
burden on government finances. Interest payments on domestic debt, which before
the crisis was almost zero, are estimated to reach Rp 55 trillion ($6.4 billion) or 19
percent of total spending in FY–2001. The government expects the gap between do-
mestic revenues and expenditures to remain for several years although the rise in
oil prices starting in late 1999 relieved budgetary pressure in 2000. The budgetary
gap in the FY–2001 is targeted at approximately 3.7 percent of GDP.
In parallel with its fiscal policy, the Indonesian government earned a reputation
for prudent monetary policy that helped keep consumer price inflation in the single
digits. However, the massive depreciation of the rupiah that began in mid-1997 and
huge liquidity injections into the banking system contributed to significant inflation.
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Indonesian monetary authorities dampened pressure on prices and the exchange
rate by significantly tightening monetary policy. There are signs that inflation may
be creeping back up as the government slowly releases the brakes on the money
supply.
The government made steady progress in trade and investment deregulation dur-
ing the decade preceding the financial crisis. Periodic deregulation packages of liber-
alization measures lowered investment barriers and instituted a program of com-
prehensive tariff reduction by staged cuts. The goal is to reduce all tariffs in the
1 to 20 percent range to 5 percent or less by 2000, and to reduce all tariffs in the
20 percent and higher range to 10 percent or less by 2003. Although the deregula-
tion packages made comparatively less progress in reducing non-tariff barriers, the
government’s collaboration with the International Monetary Fund (IMF) since No-
vember 1997 prompted much bolder measures, ending most import monopolies and
gradually opening Indonesia’s closed distribution system. Domestic interests con-
tinue to press for protection in specific sectors.
2. Exchange Rate Policies
In August 1997 the government eliminated the rupiah intervention band in favor
of a floating exchange rate policy.
3. Structural Policies
In October 1997 deteriorating conditions led Indonesia to request support from
the International Monetary Fund (IMF). The government signed its first Letter of
Intent (LOI) with the IMF on October 31, 1997. The letter called for a three-year
economic stabilization and recovery program, supported by loans from the IMF ($10
billion), the World Bank, the Asian Development Bank, and bilateral donors. Apart
from financial support, the international community also offered detailed technical
assistance to the government. Foreign governments and private organizations also
contributed food and other humanitarian assistance.
Indonesia’s agreement with the IMF has been revised repeatedly in response to
deteriorating macroeconomic conditions and political changes. The result is a com-
plex, multi-faceted program to address macroeconomic imbalances, financial weak-
nesses, real sector inefficiencies, and the loss of private sector confidence. President
Wahid’s first cabinet, installed in October 1999, signed a revised LOI in January
2000; after the cabinet reshuffle in August 2000, the new economic team endorsed
the IMF-supported economic restructuring and recovery program with minor modi-
fications.
Since 1998, the government has introduced several measures to improve govern-
ance. These include a Competition Commission that was inaugurated in September
2000 and various bodies to investigate and prevent corruption, collusion and nepo-
tism.
4. Debt Management Policies
Indonesia’s foreign debt totaled about $162 billion as of July 2000, with about $80
billion owed by the public sector and $82 billion by the private sector. Indonesia and
the Paris Club group of official creditors agreed to a second rescheduling agreement
for official debt in April 2000 covering $5.8 billion in principal payments falling due
from April 1, 2000 to March 21, 2002. In late September Bank Indonesia reached
a parallel agreement with the London Club of commercial creditors to reschedule
$340 million in principal installments on two standby loans received from a syndica-
tion of banks in 1994 and 1995.
In 1999 the government introduced a monitoring system to collect information on
all foreign exchange transactions, including foreign borrowing. Borrowing in connec-
tion with state-owned enterprises has been regulated since 1991. The government
continues to assert that it will not impose capital controls. It is also taking prelimi-
nary steps to establish a debt management unit at the Ministry of Finance.
5. Significant Barriers to U.S. Exports
In recent years, Indonesia has liberalized its trade regime and taken a number
of important steps to reduce protection. Since 1996, the government has issued a
series of deregulation packages that have reduced overall tariff levels, simplified the
tariff structure, removed restrictions, replaced nontariff barriers with more trans-
parent tariffs, and encouraged foreign and domestic private investment.
Given Indonesia’s ongoing economic reform program, the country’s tariff regime
is in rapid flux. Indonesia’s applied tariff rates range from 5 to 30 percent, although
bound rates are, in many cases, much higher. The major exception to this range are
the 170 percent duty applied to all imported distilled spirits and the tariffs on motor
vehicles and motor vehicle kits (see below). Consecutive IMF programs in which In-
donesia committed to implement a three-tier tariff structure of zero, five or ten per-
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cent on all imported products except motor vehicles and alcoholic beverages have re-
inforced the long-term liberalization policy. Indonesia also committed to eliminate
all nontariff barriers except those imposed for health or safety reasons by the end
of 2001. A further impetus to tariff liberalization is the ASEAN Free Trade Agree-
ment under which ASEAN members committed to a Common Effective Preferential
Tariff (CEPT) scheme for most traded goods by 2003. Indonesia implemented the
first stage of its AFTA tariff reductions as of January 1, 2000 reducing tariffs on
the agreed range of products to five percent or less. In June 2000 the government
implemented an overdue 1999 tariff cut package, which included 708 tariff lines and
22 product sectors. This package also implemented Indonesia’s final commitment
under the 1996 WTO Information Technology Agreement (ITA).
Import tariffs on vehicles were lowered in June 1999 to 65 to 80 percent (depend-
ing on engine size) for completely built-up sedans, 5 to 40 percent for trucks, and
35 to 65 percent for motorcycles. Rates for parts were also reduced to a maximum
15 percent. Luxury taxes for sedans range from 35 to 50 percent.
Services trade barriers to entry continue to exist in many sectors, although the
government has loosened restrictions significantly in the financial sector. Foreign
law firms, accounting firms, and consulting engineers must operate through tech-
nical assistance or joint venture arrangements with local firms.
Indonesia is liberalizing its distribution system, a trend that could accelerate as
it implements its IMF-supported program, which includes a commitment to remove
restrictions on trade in the domestic market. For example, restrictive marketing ar-
rangements for cement, paper, cloves, other spices, and plywood were eliminated in
February 1998. Indonesia has opened its wholesale and large-scale retail trade to
foreign investment, lifting most restrictions in March 1998. Some retail sectors are
still reserved for small-scale enterprises under another 1998 decree. Large and me-
dium scale enterprise that wish to invest in these sectors must enter into a partner-
ship agreement with a small-scale enterprise although this may not require a joint
venture or partial share ownership arrangement
Investment Barriers: The government is committed to reducing burdensome bu-
reaucratic procedures and substantive requirements for foreign investors. In 1994
the government dropped initial foreign equity requirements and sharply reduced di-
vestiture requirements. Indonesian law provides for both 100 percent direct foreign
investment projects and joint ventures with a minimum Indonesian equity of five
percent. In July 2000 the government revised its so-called ‘‘negative investment
list.’’ While most of the changes were minor, the decree included two controversial
provision banning foreign investment in the ‘‘multimedia sector’’ (i.e. the Internet)
and reducing the cap on foreign investment in the telecommunications sector from
95 percent to 49 percent. Under a torrent of criticism from the affected industries,
the government revoked these provisions three weeks later. Sectors that remain
closed to all foreign investment include taxi and bus transportation, local marine
shipping, film production, distribution and exhibition, radio and television broad-
casting and newspapers, some trade and retail services and forestry concessions.
The government removed foreign ownership limitations on banks and on firms pub-
licly traded on Indonesian stock markets.
The Capital Investment Coordinating Board (BKPM) must approve most foreign
investment proposals. Investments in the oil and gas, mining, forestry, and financial
services sectors are covered by specific laws and regulations and handled by the rel-
evant technical ministries. Approval procedures will be modified as the government
implements political and fiscal decentralization starting January 1, 2001.
Government Procurement Practices: In February 2000 the government enacted
Presidential Decree (Keppres) No. 18/2000 establishing new technical guidelines for
government procurement of goods and services. The decree establishes set-aside for
small- and medium-sized enterprises according to the size of the procurement. For-
eign suppliers are restricted to contracts worth over Rp. 10 billion ($1.2 million) for
goods/services and over Rp. 2 billion ($230,000) for consulting services. A foreign
supplier is required to cooperate with a small- or medium-sized company or coopera-
tive in the implementation of the contract. Most large government contracts are fi-
nanced by bilateral or multilateral donors who specify procurement procedures. For
large projects funded by the government, international competitive bidding practices
are to be followed. The government seeks concessional financing which includes a
3.5 percent interest rate, a 25-year repayment period and seven-year grace period.
Some projects do proceed on less concessional terms. Foreign firms bidding on cer-
tain government-sponsored construction or procurement projects may be asked to
purchase and export the equivalent in selected Indonesian products. Government
departments and institutes and state and regional government corporations are ex-
pected to utilize domestic goods and services to the maximum extent feasible, but
this is not mandatory for foreign aid-financed goods and services procurement.
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State-owned enterprises that have offered shares to the public through the stock ex-
change are exempted from government procurement regulations.
6. Export Subsidies Policies
Indonesia joined the GATT Subsidies Code and eliminated export-loan interest
subsidies as of April 1, 1990. As part of its drive to increase nonoil and gas exports,
the government permits restitution of VAT paid by a producing exporter on pur-
chases of materials for use in manufacturing export products. Exemption from or
drawbacks of import duties are available for goods incorporated into exports. Free
trade zones and industrial estates are combined in several bonded areas. Since
1998, the government has gradually increased the share of production that firms lo-
cated in bonded zones are able to sell domestically, up to 100 percent.
7. Protection of U.S. Intellectual Property
Indonesia is a member of the World Intellectual Property Organization (WIPO)
and in 1997 became full party to the Paris Convention for the Protection of Intellec-
tual Property, the Bern Convention for the Protection of Literary and Artistic
Works, the Patent Cooperation Treaty, and the Trademark Law Treaty. Indonesia
was the first country in the world to ratify the WIPO Copyright Treaty, but has not
ratified the companion WIPO Performances and Phonograms Treaty. In April 2000
the U.S. Trade Representative placed Indonesia on the Special 301 Watch List in
recognition of the progress that had been made on the legal regime but noted in
its report the continuing crippling weaknesses in Indonesia’s IPR enforcement re-
gime.
Among the serious deficiencies in Indonesia’s intellectual property regime are
rampant piracy of software, books, and videos, trademark piracy and an inconsistent
enforcement and ineffective legal system. In order to bring Indonesia’s laws into
compliance with the TRIPS Agreement, the Indonesian government drafted (but not
enacted as of October 2000) new laws on protection of trade secrets, industrial de-
sign and integrated circuits to complement existing laws on patents, trademarks
and copyrights. Even with the new laws in place inadequate enforcement and a non-
transparent judicial system unfamiliar with intellectual property law will pose
daunting problems for U.S. companies. The Indonesian government often responds
to U.S. companies with specific complaints about pirated goods or trademark abuse,
but the Indonesian court system can be frustrating and unpredictable, and effective
punishment of pirates of intellectual property has been rare.
Indonesia’s 1997 Patent Law addressed several areas of concern to U.S. compa-
nies, including compulsory licensing provisions, a relatively short term of protection,
and a provision that allowed importation of 50 pharmaceutical products by non-pat-
ent holders.
8. Worker Rights
a. The Right of Association: Private sector workers, including those in export proc-
essing zones, are by law free to form worker organizations without prior authoriza-
tion. In August 2000 the government enacted a new law governing trade unions that
continued a trend since 1998 toward removing barriers to freedom of association.
Some labor organizations criticized the new law for maintaining some existing re-
strictions on unions. Since 1998, more than 20 new or previously unrecognized
unions have formed. The courts may dissolve a union under the 2000 law if union
members are convicted of crimes against the state.
Civil servants are no longer required to belong to KORPRI, a nonunion associa-
tion whose central development council is chaired by the Minister of Home Affairs.
State enterprise employees, defined to include those working in enterprises in which
the state has a five percent holding or greater, usually were KORPRI members in
the past, but a small number of state enterprises have units of the Federation of
All-Indonesian Trade Unions (SPSI). New unions are now seeking to organize em-
ployees in some state-owned enterprises. Teachers must belong to the teachers’ asso-
ciation (PGRI). All organized workers except civil servants have the legal right to
strike. Private sector strikes are frequent.
b. The Right to Organize and Bargain Collectively: Registered unions can legally
engage in collective bargaining and can collect dues from members through a check-
off system. In companies without unions, the government discourages workers from
utilizing outside assistance, preferring that workers seek its assistance. By regula-
tion, negotiations must be concluded within 30 days or be submitted to the Depart-
ment of Manpower for mediation and conciliation or arbitration. Agreements are for
two years and can be extended for one year. According to NGOs involved in labor
issues, the provisions of these agreements rarely go beyond the legal minimum
standards established by the government, and the agreements are often merely pre-
sented to worker representatives for signing rather than being negotiated.
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Although government regulations prohibit employers from discriminating or
harassing employees because of union membership, there are credible reports from
union officials of employer retribution against union organizers, including firing,
which is not effectively prevented or remedied in practice. Administrative tribunals
adjudicate charges of antiunion discrimination. However, because many union mem-
bers believe the tribunals generally side with employers, many workers reject or
avoid the procedure and present their grievances directly to the national human
rights commission, parliament and other agencies. Security forces continue to in-
volve themselves in labor issues, despite the Minister of Manpower’s revocation in
1994 of a 1986 regulation allowing the military to intervene in strikes and other
labor actions.
c. Prohibition of Forced or Compulsory Labor: The law forbids forced labor, and
the government generally enforces it. However, according to credible sources, there
are several thousand children working on fishing platforms off the East Coast of
North Sumatra in conditions of bonded labor. Most are recruited from farming com-
munities, and once they arrive at the work site, are not permitted to leave for at
least three months and until a replacement worker can be found. In 1999 the gov-
ernment ratified ILO Conventions 105 (Forced Labor) and began removing children
from the fishing platforms.
d. Minimum Age for Employment of Children: Child labor exists in both industrial
and rural areas, and in both the formal and informal sectors. According to a 1995
report of the Indonesian Central Bureau of Statistics, four percent of Indonesian
children between the ages of 10 and 14 work full-time, and another four percent
work in addition to going to school. Many observers believe that number to be sig-
nificantly understated, because documents verifying age are easily falsified, and be-
cause children under 10 were not included. Indonesia was one of the first countries
to be selected for participation in the ILO’s International Program on the Elimi-
nation of Child Labor (IPEC). Although the ILO has sponsored training of labor in-
spectors on child labor matters under the IPEC program, enforcement remains lax.
In April 1999 the government ratified ILO Convention 138, which establishes a min-
imum working age of 15, and in March 2000 the government ratified ILO conven-
tion 182 on the Elimination of the Worst Forms of Child Labor.
e. Acceptable Conditions of Work: Indonesia does not have a national minimum
wage. Rather, area wage councils working under the supervision of the national
wage council establish minimum wages for regions and basic needs figures for each
province, a monetary amount considered sufficient to enable a single worker to meet
the basic needs of nutrition, clothing, and shelter. In Jakarta, the minimum wage
is about $40 (Rp. 344,000) per month (at an exchange rate of Rp 8500 to the dollar).
There are no reliable statistics on the number of employers paying at least the min-
imum wage. Independent observers’ estimates range between 30 and 60 percent.
Labor law and ministerial regulations provide workers with a variety of other
benefits, such as social security, and workers in more modern facilities often receive
health benefits, free meals, and transportation. The law establishes seven-hour
workdays and 40-hour workweeks, with one 30-minute rest period for each 4 hours
of work. The law also requires one day of rest weekly. The daily overtime rate is
11⁄2 times the normal hourly rate for the first hour, and twice the hourly rate for
additional overtime. Observance of laws regulating benefits and labor standards
varies from sector to sector and by region. Employer violations of legal requirements
are fairly common and often result in strikes and employee protests. In general, gov-
ernment enforcement and supervision of labor standards is weak. Both law and reg-
ulations provide for minimum standards of industrial health and safety. In the
largely western-operated oil sector, safety and health programs function reasonably
well. However, in the country’s 100,000 larger registered companies in the non-oil
sector, the quality of occupational health and safety programs varies greatly. The
enforcement of health and safety standards is severely hampered by corruption, by
the limited number of qualified Department of Manpower inspectors and by the low
level of employee appreciation for sound health and safety practices. Workers are
obligated to report hazardous working conditions. Employers are forbidden by law
from retaliating against those who do, but the law is not effectively enforced.
f. Rights in Sectors with U.S. Investment: Working conditions in firms with U.S.
ownership are widely recognized as better than the norm for Indonesia. Application
of legislation and practice governing worker rights is largely dependent upon wheth-
er a particular business or investment is characterized as private or public. U.S. in-
vestment in Indonesia is concentrated in the petroleum and related industries, pri-
mary and fabricated metals (mining), and pharmaceutical sectors.
Foreign participation in the petroleum sector is largely in the form of production
sharing contracts between the foreign companies and the state oil and gas company,
Pertamina, which retains control over all activities. All direct employees of foreign
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companies under this arrangement are considered state employees and thus all leg-
islation and practice regarding state employees generally applies to them. Employ-
ees of foreign companies operating in the petroleum sector are organized in
KORPRI. Employees of these state enterprises enjoy most of the protection of Indo-
nesia labor laws but, with some exceptions, they do not have the right to strike, join
labor organizations, or negotiate collective agreements. Contract workers in the pe-
troleum sector do have the right to organize and have joined independent trade
unions. A 1995 Minister of Manpower regulation exempts the petroleum sector from
legislation requiring employers to give permanent worker status to workers who
have worked for the company under short-term contracts for more than three years.
Some companies operating under other contractual arrangements, such as contracts
of work and, in the case of the mining sector, coal contracts of work, do have unions
and collective bargaining agreements.
Regulations pertaining to child labor and child welfare are applicable to employers
in all sectors. Employment of children and concerns regarding child welfare are not
considered major problem areas in the petroleum and fabricated metals sectors. Leg-
islation regarding minimum wages, hours of work, overtime, fringe benefits, health
and safety applies to all sectors. The best industrial and safety record in Indonesia
is found in the oil and gas sector.
Extent of U.S. Investment in Selected Industries—U.S. Direct Investment Position Abroad on an
Historical Cost Basis—1999
[Millions of U.S. Dollars]
Category Amount
Petroleum .......................................................................... 7,378
Total Manufacturing ......................................................... 66
Food and Kindred Products .......................................... 20
Chemicals and Allied Products .................................... 79
Primary and Fabricated Metals ................................... 5
Industrial Machinery and Equipment ......................... –21
Electric and Electronic Equipment .............................. 19
Transportation Equipment ........................................... (1)
Other Manufacturing .................................................... (1)
Wholesale Trade ............................................................... 8
Banking ............................................................................. 287
Finance/Insurance/Real Estate ........................................ 287
Services .............................................................................. 53
Other Industries ............................................................... 2,424
TOTAL ALL INDUSTRIES ............................................. 10,504
(1) Suppressed to avoid disclosing data of individual companies.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
JAPAN
Key Economic Indicators
[Billions of U.S. Dollars unless otherwise indicated]
1998 1999 2000
Income, Production and Employment:
Nominal GDP ............................................................ 3,808.2 4,346.8 4,622.1 1
Real GDP Growth (pct) ............................................. –2.5 .2 1.0 1
GDP by Sector:
Agriculture ............................................................. 54.29 N/A N/A
Manufacturing ....................................................... 895.5 N/A N/A
Services ................................................................... 695.4 N/A N/A
Government ............................................................ 317.2 N/A N/A
Per Capita Income (US$) .......................................... 30,086 34,283 36,455 1
Labor Force (millions) ............................................... 67.9 67.8 67.4 2
Unemployment Rate (pct) ......................................... 4.1 4.7 4.8 3
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Key Economic Indicators—Continued
[Billions of U.S. Dollars unless otherwise indicated]
1998 1999 2000
Money and Prices (annual percentage growth):
Money Supply (M2+CD) ........................................... 4.0 3.6 2.3 3
Consumer Price Inflation .......................................... 0.6 –0.3 –0.7 2
Exchange Rate (Yen/US$) ........................................ 130.90 113.91 106.84 2
Balance of Payments and Trade:
Total Exports FOB .................................................... 374.4 403.9 460.7 4
Exports to United States FOB .............................. 118.4 121.8 144.0 5
Total Imports CIF ..................................................... 251.7 280.5 328.8 4
Imports from United States CIF .......................... 67.0 57.8 62.9 5
Trade Balance ............................................................ 122.7 123.4 131.9 4
Trade Balance with United States ....................... 51.4 64.0 81.0 5
Current Account Surplus/GDP (pct) ........................ 3.2 2.5 N/A
External Public Debt ................................................. 0 0 0
Debt Service Payments/GDP (pct) ........................... 0 0 0
Fiscal Deficit/GDP (pct) ............................................ –10.2 N/A N/A
Gold and Foreign Exchange Reserves ..................... 215.9 288.1 344.9 6
Aid from United States ............................................. 0 0 0
Aid from All Other Sources ...................................... 0 0 0
1 January–March, seasonally adjusted, annualized.
2 January–June, non-seasonally adjusted average.
3 January–June, seasonally adjusted average.
4 January–June, seasonally-adjusted, annualized.
5 January–July, non-seasonally adjusted, annualized.
6 As of end-July 2000.
Sources: Ministry of Finance (trade figures BOP basis); Economic Planning Agency; Bank of Japan, OECD
Economic Outlook, U.S. Bureau of Census.
1. General Policy Framework
The Japanese economy is gradually recovering from the worst recession in post-
war history. Real GDP contracted by 2.5 percent in 1998, and the effects of this se-
vere slowdown were reflected in corporate bankruptcies and record rates of unem-
ployment. A modest recovery is now underway, with real GDP growing by 0.3 per-
cent in 1999. This trend is expected to continue, and the government projects
growth of one percent in the current fiscal year, which ends at the end of March
2001.
Japan’s economic performance has been highly variable over the past ten years,
as the end of the ‘‘bubble economy’’ in 1991 gave way to sharp changes in asset
prices and the need for restructuring in the corporate and financial sectors. The
more pronounced slowdown of the past few years was due to a combination of fac-
tors, including a cyclical decline, substantially weakened Asian demand for Japa-
nese exports, and a crisis in the domestic banking system.
The policy response to Japan’s recession has been an expansionary fiscal policy,
made possible through a series of supplemental budgets, emergency spending pack-
ages (largely concentrated on public works to boost private demand), and special
loan guarantees to stem the tide of corporate bankruptcies. Monetary policy was
also accomodative, with the Bank of Japan attempting to keep interest rates as low
as possible to encourage investment.
Based on Japanese statistics, Japan posted a global trade surplus of $123.4 billion
in 1999, with a $61.5 billion bilateral surplus with the United States, an increase
of 19.6 percent over 1998. Both these figures are expected to rise in 2000 as Japan’s
economic growth is expected to remain below that of both the United States and the
EU. Continued strong growth in the United States, combined with a recovery among
Asian economies, should support Japanese exports. Imports are also expected to rise
in line with economic recovery. (Note: U.S. Customs figures show a $73 billion def-
icit with Japan in 1999, on U.S. exports of $57.4 billion and imports of $130.8 bil-
lion. The discrepancy is mostly accounted for by differences in CIF and FIB prices).
2. Exchange Rate Policy
The yen demonstrated some volatility against the dollar in 1998–99, although
more moderate than the previous year. The average exchange rate through the first
seven months of 2000 was 107 yen per dollar, compared to 113 yen per dollar in
1999. A new Foreign Exchange Law in April 1998 decontrolled most remaining bar-
riers to cross-border capital transactions.
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3. Structural Policies
Pricing Policy: Japan has a market economy, with prices generally set in accord-
ance with supply and demand. However, with very high gross retail margins (need-
ed to cover high fixed and personnel costs) and a complex distribution system, Ja-
pan’s retail prices exhibit a greater downward stickiness than in other large market
economies. Moreover, some sectors such as construction are susceptible to cartel-like
pricing arrangements, and in many key sectors heavily regulated by the government
(i.e., transport and warehousing), it can still exert some limited temporary authority
over pricing.
Tax Policy: Total tax revenues as a share of GDP in Japan are comparable to the
United States and the UK, and on the low end of OECD countries. Japan had a
relatively high corporate tax rate, but recent legislation has reduced the (combined
central and local government) effective corporate tax rate from 47 to 40.9 percent,
bringing it in line with other OECD countries. The maximum marginal rate for per-
sonal income taxes was also reduced from 65 to 50 percent. There is a general con-
sumption tax (actually a broad value-added tax) of five percent, although small re-
tail outlets are exempted.
Regulatory and Deregulation Policy: Japan’s economy is highly regulated. Al-
though the government and business community recognize that deregulation is
needed to spur growth, opposition to change remains strong among vested-interest
groups, and the economy remains burdened by numerous national and local govern-
ment regulations, which have the effect of impeding market access by foreign firms.
Official regulations also reinforce traditional Japanese business practices that re-
strict competition, help block new entrants (domestic or foreign) and raise costs. Ex-
amples of regulations that act as impediments include: exceedingly high tele-
communications interconnection rates, prolonged approval processes for medical de-
vices and pharmaceuticals, and severe restrictions on foreign lawyers. Japan has ap-
propriate anti-monopoly legislation, and in 1999 concluded an antitrust cooperation
agreement with the United States. Nevertheless, enforcement of competition policy
lacks needed rigor.
In June 1997 the President and the Japanese Prime Minister agreed on an En-
hanced Initiative on Deregulation and Competition Policy under the U.S.-Japan
Framework Agreement. During its fourth year, the Initiative is focusing on achiev-
ing concrete deregulation in key sectoral and structural areas in Japan, such as
telecommunications and information technology, housing, energy, financial services,
medical devices and pharmaceuticals, distribution, competition policy, and trans-
parency in government rule-making.
4. Debt Management Policies
Japan is the world’s largest net creditor. The Bank of Japan’s foreign exchange
reserves exceed $345 billion. It is an active participant together with the United
States in international discussions of developing-country indebtedness issues in a
variety of fora.
5. Significant Barriers to U.S. Exports
Japan is the United States’ third largest export market, after Canada and Mexico.
The United States is the largest market for Japanese exports. However, in many
sectors U.S. exporters continue to enjoy incomplete access to the Japanese market.
While Japan has reduced its formal tariff rates on most imports to relatively low
levels, it has maintained non-tariff barriers, such as nontransparent regulation and
government procedure, discriminatory standards, and exclusionary business prac-
tices. Japan also tolerates a business environment that protects established compa-
nies and restricts the free flow of competitive foreign goods into the Japanese mar-
ket.
Transportation: In January 1998 the United States and Japan concluded a new
agreement to significantly liberalize the trans-Pacific civil aviation market. This
eliminated many restrictions and resolved a dispute over the rights of longtime car-
riers to fly through Japan to other international destinations. It opened doors for
carriers that recently entered the U.S.-Japan market, nearly tripling their access to
Japan. The agreement also allowed code sharing (strategic alliances) between car-
riers for the first time, thereby greatly increasing their operational flexibility. While
U.S. carriers have been generally happy with the results of the 1998 agreement,
there is growing concern over the inadequacy of facilities, scarcity of slots, and high
landing fees.
American ocean going ships serving Japanese ports have long encountered a re-
strictive, inefficient and discriminatory system of port transportation services. After
the Federal Maritime Commission (FMC) ruled in early 1997 that Japan maintained
unfair shipping practices and proposed fines against Japanese ocean freight opera-
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41
tors, the Japanese government pledged to grant foreign carriers port transport li-
censes, and, at the same time, to reform the prior consultation system which allo-
cates work on the waterfront and requires carriers to obtain approval for any
change in their operations. The FMC imposed fines in September 1997 after Japan
failed to carry out the reforms. Shortly afterwards, however, the government com-
mitted itself to actions that would have provided a solid foundation for reform of
Japanese port practices. However, a final report on deregulation issued by the Japa-
nese government in mid-1999 was discouraging for its lack of aggressive proposals
for deregulating ports. The Diet passed several resolutions regarding the Port
Transportation Business Law in May 2000 including the elimination of demand and
supply adjustments and changing the fee permission system to a registration sys-
tem. The new law will go into effect November 1.
Energy: The government of Japan has taken a number of steps to begin deregu-
lating its energy sector. Within the Enhanced Initiative for deregulation the U.S.
government is urging Japan to speed up the process. Open and non-discriminatory
access to electrical transmission and distribution grids and to LNG terminals and
pipelines are key steps for Japan. Competitive, transparent pricing also remains as
a key unresolved issue in the Japanese market.
Agricultural and Wood Products: Japan is the largest export market for U.S. farm
and wood products. Sales are limited, however, by a variety of protectionist meas-
ures maintained by the government of Japan. Key priorities for trade liberalization
include tariff reduction on raw and value-added products, elimination of unneces-
sary plant quarantine measures, more market-oriented domestic farm policies, mu-
tual recognition of certification on organic foods and wood products, a commitment
to science-based policies and education programs on foods produced through bio-
technology, and continued deregulation of the housing sector affecting access for
wood products. Timely approval, acceptance, and ultimately sales of U.S. wood prod-
ucts are still limited by excessive regulation and continued reliance on prescriptive
codes/standards. Unnecessary tariffs on processed wood products place additional
costs on end-users.
Significant tariff reduction in Japan was achieved through the Uruguay Round
Agreement, but agricultural tariffs in Japan remain high, ranging from 10 to 40
percent on a wide variety of items, including beef, oranges, and many processed
foods. These tariffs limit sales of U.S. farm products by encouraging substitution for
local competitors and/or reducing consumption altogether.
Biotechnology: Japan has adopted a scientific approach in its approval process for
genetically modified (GM) foods. To date, the Ministry of Agriculture, Forestry and
Fisheries (MAFF) and the Ministry of Health and Welfare (MHW), which regulate
biotechnology products, have approved the importation of 29 GM plant varieties, in-
cluding corn, potatoes, cotton, tomatoes, and soybeans.
While U.S. and Japanese regulatory approaches to assessing safety of biotech
products have been closely aligned, the United States is very concerned by Japan’s
decision to implement mandatory labeling of 24 whole and semi-processed foods
made from corn and soybeans beginning April 2001.
Plant Protection and Quarantine Measures: Japan’s failure to adopt system-wide
sound scientific plant protection principles restricts entry of a wide variety of U.S.
fresh fruits and vegetables. FAS/Japan estimates that unnecessary plant quarantine
restrictions and requirements cost U.S. agriculture more than $500 million in lost
sales opportunities every year. Japan unnecessarily restricts imports through the
following measures: outright bans on many products without sufficient scientific evi-
dence that entry of the product presents a legitimate threat to local agriculture; un-
necessary testing and inspection requirements that raise costs and reduce competi-
tiveness of U.S. produce in Japan; failure to accept alternatives to methyl bromide
fumigation for control of pests; and unnecessary fumigation requirements for com-
mon pests that are already found in Japan.
In July 1999 the Japanese Agricultural Standard Law was amended to allow test-
ing organizations overseas to function as JAS-registered grading organization and/
or JAS-registered certification organization, to put them on equal footing with their
Japanese counterparts. The Ministry of Agriculture, Forestry and Fisheries has sub-
sequently clarified that a prerequisite for functioning as RGO/RCO is a determina-
tion of equivalency, i.e., a determination that the standards system in the applicant
countries is open to Japanese manufacturers. MAFF should determine, in a timely
way, a reasonable equivalency policy allowing U.S. testing organizations to apply to
function as foreign JAS-registered grading organizations and/or JAS-registered cer-
tification organizations.
The government of Japan has taken steps to make the Building Standard Law
(BSL) performance-based, in line with its commitment to implement performance-
based codes. The United States is asking the Ministry of Construction to initiate a
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review of certain provisions of the BSL which the United States deems prescriptive,
including those related to restrictions on the construction of special buildings.
In housing policy, Japan has taken limited steps to make the sector more competi-
tive and to make a greater variety of housing available to consumers at lower cost.
In the deregulation initiative, the United States continues to encourage Japan to
take steps to establish a competitive secondary market for housing and to encourage
the development of a larger market for refurbishing and remodeling existing homes.
Telecommunications and Broadcasting: Japan is a signatory of the WTO Basic
Telecommunications Agreement of 1997, which promotes market access, investment
and pro-competitive regulation in the telecommunications industry. In recent years,
the United States has pushed Japan to foster a more pro-competitive regime in the
telecommunications sector. In July 2000 Japan agreed to implement significant re-
ductions in interconnection fees for connecting to the dominant carriers’ local net-
works. This is expected to result in lower interconnection costs and increased com-
petition in telephone services. However, progress overall has been incremental and
access to the telecommunications and broadcasting market in Japan remains con-
strained by both regulatory and anti-competitive practices. New entrants continue
to face higher costs and longer waiting period for connecting to the dominant car-
riers’ local network than in other advanced countries, deterring competition. In ad-
dition, new carriers’ difficulty in gaining access to facilities and land to build their
networks, government restrictions on combining owned and leased facilities in cre-
ating a network, and the lack of access to discrete portions of the local dominant
carriers’ network at reasonable costs have slowed and raised the costs of new car-
riers’ entrance. Discriminatory and anti-competitive discount pricing plans by the
dominant carriers have put new entrants at a serious disadvantage in developing
Internet services. The United States remains very concerned by the Japanese gov-
ernment’s intent to combine the Ministry of Post and Telecommunications and the
Japan Fair Trade Commission within a new General Affairs Ministry early in 2001
and continues to urge Japan to create a stronger regulatory firewall between the
two. The U.S. government has sought from Japanese regulators steps to address
these issues under the U.S.-Japan Enhanced Initiative on Deregulation and Com-
petition Policy.
Foreign computer and telecommunications equipment suppliers continue to have
difficulty selling to the Japanese public sector, having an extremely low share of
this market. In addition, procurement from foreign sources by NTT (Nippon Tele-
graph and Telephone) group companies, which collectively are the largest purchaser
of telecommunications equipment in Japan, remain below the level of foreign pro-
curement by Japanese private sector telecommunications carriers. Foreign invest-
ment restrictions remain on NTT and on Direct-To-Home (DTH) satellite broad-
casting companies.
Information Technology: The government of Japan has announced a major initia-
tive to spur Japan forward in an IT revolution. High internet access fees remain
but one of a number of major impediments still impeding the development of more
widespread use of IT in Japan.
Standards, Testing, Labeling and Certification: Standards, testing, labeling and
certification problems hamper market access in Japan. In some cases, advances in
technology, products or processing make Japanese standards outdated and restric-
tive. Domestic industry often supports standards that are unique and restrict com-
petition, although in some areas external pressure has brought about the simplifica-
tion or harmonization of standards to comply with international practices. Fresh ag-
ricultural products continue to be subject to extensive restrictions, including
phytosanitary restraints, required overseas production-site inspections, fumigation
requirements for non-quarantine pests, and tariff rate or minimum access restric-
tions.
The United States believes that mandatory labeling will stigmatize foods derived
through biotechnology by suggesting a health risk when there is none. In fact, al-
ready, in response to the release of MAFF’s plans to require labeling, many manu-
facturers of products to be subject to mandatory labeling have recently switched, or
have declared they will switch, to non-genetically engineered ingredients. The recent
shift by industry to non-genetically engineered ingredients demonstrates that MAFF
has added to the confusion and false misperceptions about the safety of biotech
foods through its plans to require labeling.
The United States agrees that labeling is necessary when there is a health or
safety reason, such as a presence of an allergen, or when there are changes in the
characteristic of the food, such as an altered nutritional content. In these cases, the
specific change is the subject of a label, rather than the process by which it is pro-
duced.
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MAFF has stated that the objective of extending a mandatory labeling require-
ment to food that has been produced through biotechnology is to provide information
to the consumer. The United States agrees that it is important for consumers to
have information on foods that have been genetically engineered. The United States
believes there are a number of means other than labeling, such as educational mate-
rials and public fora, that can collectively provide more meaningful information to
consumers on genetic engineering.
Organic Certification: Effective April 1, 2001, all U.S. certified organic foods must
also obtain additional certification by organizations incorporated in Japan. Products
not certified by Japanese organizations may not be marketed as ‘‘organic’’ in Japan.
The additional certification requirement is considered unnecessary, costly, and a se-
rious threat to continued imports of U.S. organic foods, estimated at up to $100 mil-
lion per year. The U.S. Department of Agriculture ISO Guide 65 accreditation pro-
gram provides sufficient assurance that certified products meet Japanese standards.
ISO Guide 65 is the internationally recognized norm for conformity assessments of
third-party certifiers.
Foreign Direct Investment (FDI): FDI in Japan has remained extremely small in
scale relative to the size of the economy. In Japan fiscal year 1999, Japan’s annual
inward FDI totaled 21.5 billion (up from $10.5 billion the previous year) but still
only 0.5 percent of its GDP. (Comparatively, FDI for the United States in 1999 was
$276 billion, according to UN Conference on Trade and Development figures). Al-
though in Japan, inward foreign investment is on the rise, Japan continues to host
the smallest amount of FDI as a proportion of total output of any major OECD na-
tion. The low level of FDI reflects the high cost-structure of doing business (for ex-
ample, registration, licenses, land prices and rents), the legacy of former investment
restrictions, and a continuing environment of structural impediments to greater for-
eign investment. The challenges facing foreign investors seeking to establish or en-
hance a presence in Japan include: laws and regulations that directly or indirectly
restrict the establishment of business facilities, close ties between government and
industry, informal exclusive buyer-supplier networks and alliances, high taxation,
extensive cross-shareholding by Japanese firms, and a difficult regulatory environ-
ment for foreign or domestic acquisitions of existing Japanese firms.
Recently, the Japanese government has implemented potentially useful measures
for increasing FDI, including easing restrictions on foreign capital entry. Accounting
changes introduced a wide range of new regulations and practices. Consolidated dis-
closure of contingent liabilities/guarantees on April 1, 1998, and implementation of
stricter consolidated financial accounting on April 1, 1999 (showing up on corporate
books on March 31, 2000), were the first Big-Bang accounting reforms. However,
much of the recent vigorous corporate activity is impelled by the subsequent intro-
duction of mark-to-market accounting for financial products and corporate pension
assets introduced on April 1, 2000. This includes the disclosure of unfunded pension
liabilities, and requires that firms make good on any pension shortfalls within 15
years.
The government has also passed legislation modeled on U.S. Chapter 11 bank-
ruptcy procedures and corporate divestiture laws to promote efficient business reor-
ganization. Such legislation should facilitate corporate restructuring and buy-outs
by foreign and domestic investors.
In October 1998 the U.S. government proposed to the Japanese government 18
new reforms in the areas of mergers and acquisitions, land, and labor policy to im-
prove Japan’s environment for foreign direct investment. In May 1999 both govern-
ments submitted a Joint report to the President and Prime Minister on the status
of Japan’s investment climate and measures under consideration. The bilateral In-
vestment Working Group (IWG) held talks in Tokyo in October 1999 and April 2000
that covered a range of investment issues under the auspices of the IWG. In March
2000 the United States and Japan jointly sponsored a symposium that focused on
private sector concerns with regard to Japan’s climate for investment and mergers
and acquisitions. The group intends to continue consultations and the exchange of
information as stipulated in the joint report.
Government Procurement Practices: Japan is a party to the 1996 WTO Govern-
ment Procurement Agreement. While government procurement in Japan at the na-
tional, regional and local levels generally conform to the letter of the WTO agree-
ment, there are reports that at some procuring entities, established domestic com-
petitors continue to enjoy preferential access to tender information. In some sectors,
unfair low pricing remains a problem, preventing companies from winning contracts
based on open and transparent bidding procedures. Moreover, some entities con-
tinue to draw up tender specifications in a way that favors a preferred vendor, using
design-based specifications rather than more neutral performance-based specifica-
tions.
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Customs Procedures: The Japanese Customs Authority has made progress in
automating its clearing procedures, and efforts are underway to integrate the proce-
dures of other government agencies over the next several years. However, U.S. ex-
porters still face relatively slow and burdensome processing.
6. Export Subsidies Policies
Japan’s official development assistance for Asian countries in 1998 rose 71 percent
from the previous year as the government focused on helping its neighbors recover
from the region-wide economic crisis. Japan remained the world’s top aid donor in
1998 for the eighth consecutive year, disbursing a total of $10.77 billion, up 14.2
percent from 1997. Although Japan had been moving towards untying its aid, dur-
ing the past two years this trend has reversed. Both its Environmental Aid loans
and its Special Yen loans are tied to the purchase of Japanese products. Not only
does this limit U.S. firms’ ability to participate in these projects; it also denies re-
cipient countries the opportunity to use this aid as efficiently as possible. This trend
towards retying has been actively opposed by the U.S. government. In addition, the
U.S. government continues to address U.S. industry concerns that feasibility studies
funded by Japanese grant aid, and tied to the use of Japanese firms, result in tech-
nical specifications that unduly favor Japanese firms.
7. Protection of U.S. Intellectual Property Rights
Japan is a party to the Bern and Universal Copyright Conventions, the Paris Con-
vention on Industrial Property, the Patent Cooperation Treaty, and the WTO Agree-
ment on Trade-Related Aspects of Intellectual Property Rights (TRIPs). Japan was
removed from the Special 301 Watch List on May 1, 2000, but the United States
will keep monitoring Japan’s protection of intellectual property rights.
While Japan’s IPR regime affords national treatment to U.S. entities, the United
States has long been concerned by the long processing time for patent examination.
Although Japan has recently reduced the time which the Japan Patent Office takes
before responding to the applicant (i.e. the First Action Period) from 21 to 19
months, this period is still longer than in other industrialized countries. This length
of time coupled with Japan’s practice of opening all patent applications to public in-
spection 18 months after filing, exposes applications to lengthy public scrutiny with
the potential of limiting legal protection.
Many Japanese companies use the patent filing system as a tool of corporate
strategy, making many applications to cover slight variations in technology. How-
ever, a February 1998 decision by Japan’s Supreme Court to permit an infringement
finding under the ‘‘the doctrine of equivalence’’ may reduce this practice and is a
positive step toward broadening Japanese courts’ generally narrow interpretation of
patent rights. The rights of U.S. subscribers in Japan can be circumscribed by fil-
ings of applications for similar inventions or processes.
Japan’s protection of trade secrets is inadequate. Because Japan’s Constitution
prohibits closed trials, the owner of a trade secret seeking redress for misappropria-
tion of the secret is put in the difficult position of not being able to protect a trade
secret without disclosing it publicly. While a recent amendment to Japan’s Civil Pro-
cedures Act excludes Japanese court records containing trade secrets from public ac-
cess, this legislation does not adequately address the problem. Court proceedings of
trade secrets remain open to the public and neither the parties nor their attorneys
have confidentiality obligations.
Japan’s Trademark Law was revised in 1997 to speed the granting of trademark
rights, strengthen protection to well-known trademarks, address problems related to
unused trademarks, simplify registration procedures, and increase infringement
penalties. Japan became a member of the Madrid Protocol as of March 14 to realize
simple trademark application multi-nationally. Japan started keeping statistics of
the First Action Period for trademark applications in 1998. The latest data show
that it takes about ten months. The United States will keep monitoring Japan’s ap-
proval time. Since trademarks must be registered in Japan to ensure enforcement,
delays make it difficult for foreign parties to enforce their marks.
End-user software piracy remains a major concern of U.S. and some Japanese
software developers. Effective January 2001, Japan will raise the level of punitive
damages for software piracy from 3 million yen to 100 million yen. However, there
are other issues that need to be considered. Japan still does not require protection
of temporary copies even though it signed the Bern Convention and the 1996 WIPO
Copyright Act, both of which require the protection of temporary copies of software,
music, film, or anything else.
Japan’s lack of a system of statutory damages is also a problem. Under the Japa-
nese system, right holders need to prove actual loss in order to qualify for any com-
pensation from violators. A system of statutory damages under which right holders
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would only need to prove the loss and then could be awarded damages within a
fixed range for each work violated based on a subjective judgement of the amount
of damage would improve protection in Japan.
8. Worker Rights
a. The Right of Association: Japan’s Constitution and domestic labor law provide
for the right of workers to freely associate in unions. Approximately 23 percent of
Japan’s labor force is unionized. The Japanese Trade Union Confederation
(RENGO), which represents 7.8 million workers, is the largest labor organization.
Both public and private sector workers may join a union, although members of the
armed forces, police and firefighters may neither form unions nor strike. The right
to strike, although implicit in the constitution, is seldom exercised. The law pro-
hibits retribution against strikers and is effectively enforced.
b. The Right to Organize and Bargain Collectively: The constitution provides
unions with the right to organize, bargain and act collectively. These rights are free-
ly exercised, and collective bargaining is practiced widely, particularly during the
annual ‘‘Spring Wage Offensive’’ of nationwide negotiations.
c. Prohibition of Forced or Compulsory Labor: Article 18 of the Japanese Constitu-
tion states that ‘‘No person shall be held in bondage of any kind. Involuntary ser-
vitude, except as punishment for crime, is prohibited.’’ This provision applies both
to adults and children, and forced or bonded labor is not perceived as a problem.
Japan is, however, a destination country for the trafficking of women for prostitu-
tion through debt bondage.
d. Minimum Age for Employment of Children: By law, children under the age of
15 may not be employed, and those under age 18 may not work in dangerous or
harmful jobs. Child labor is virtually non-existent in Japan, as societal values and
the rigorous enforcement of the Labor Standards Law protect children from exploi-
tation in the workplace.
e. Acceptable Conditions of Work: Minimum wages are set on both a sectoral and
regional (prefectural) level. Minimum wages ranged from $50 per day in Tokyo to
$42 in Okinawa. The Labor Standards Law provides for a 40-hour work week in
most industries and mandates premium pay for hours worked beyond 40 hours in
a week or eight hours in a day. However, labor unions criticize the Japanese govern-
ment for failing to enforce working hour regulations in smaller firms. The govern-
ment effectively administers laws and regulations affecting workplace safety and
health.
f. Worker Rights in Sectors with U.S. Investment: Labor regulations, working con-
ditions and worker rights in sectors where U.S. capital is invested do not vary from
those in other sectors of the economy.
Extent of U.S. Investment in Selected Industries—U.S. Direct Investment Position Abroad on an
Historical Cost Basis—1999
[Millions of U.S. Dollars]
Category Amount
Petroleum .......................................................................... 4,419
Total Manufacturing ......................................................... 13,332
Food and Kindred Products .......................................... 850
Chemicals and Allied Products .................................... 3,397
Primary and Fabricated Metals ................................... 323
Industrial Machinery and Equipment ......................... 1,049
Electric and Electronic Equipment .............................. 2,054
Transportation Equipment ........................................... 2,044
Other Manufacturing .................................................... 3,615
Wholesale Trade ............................................................... 5,429
Banking ............................................................................. 608
Finance/Insurance/Real Estate ........................................ 14,928
Services .............................................................................. 7,132
Other Industries ............................................................... 1,938
TOTAL ALL INDUSTRIES ............................................. 47,786
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
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REPUBLIC OF KOREA
Key Economic Indicators
[Millions of U.S. Dollars unless otherwise indicated]
1998 1999 2000 1
Income, Production and Employment:
GDP (nominal/factor cost) ................................. 321,300 406,700 459,796
Real GDP Growth (pct) 2 ................................... –6.7 10.7 8.6
GDP by Sector:
Agriculture/Fisheries ..................................... 15,768 20,326 23,345
Manufacturing ............................................... 98,521 129,344 147,764
Electricity/Gas/Water .................................... 7,519 10,682 12,600
Construction ................................................... 32,560 35,639 37,626
Financial Services .......................................... 62,886 80,049 90,726
Government Services ..................................... 25,864 30,150 32,897
Other ............................................................... 78,182 100,517 114,839
Government Expenditure (pct/GDP) ................ 10 8.3 10
Per Capita GNI (US$) ....................................... 6,823 8,581 10,000
Labor Force (000s) ............................................. 21,456 21,634 21,778
Unemployment Rate (pct) ................................. 7.4 6.3 4
Money and Prices (annual percentage rate):
Money Supply (M2) ........................................... 24 27.9 24.6
Corporate Bonds 3 .............................................. 15.1 8.9 9.58
Personal Savings Rate ...................................... 24.4 24.2 23.4
Retail Inflation .................................................. 7.5 0.8 2.1
Wholesale Inflation ........................................... 12.2 –2.1 2.2
Consumer Price Index (1995 base) .................. 117.8 118.8 121.3
Average Exchange Rate (Won/US$) ................. 1,399 1,189.5 1,116.8
Balance of Payments and Trade:
Total Exports FOB 4 .......................................... 132,313 143,685 168,174
Exports to United States 4 ............................ 22,805 29,475 35,068
Total Imports CIF 4 ........................................... –93,282 –119,752 –158,530
Imports from United States 4 ........................ –20,403 –24,922 –29,443
External Debt 5 .................................................. 148,700 137,100 140,540
Debt Service Payments 6 ................................... –29,800 –24,000 –58,700
Gold and FOREX Reserves 7 ............................ 52,041 74,055 92,530
1 2000 figures are estimates based on available monthly data as of October.
2 Growth based on won the local currency.
3 Figures are average annual interest rates.
4 Merchandise trade, measured on customs clearance basis; Korean government data. (Estimated figures
are for the entire year 2000).
5 Gross debt; includes non-guaranteed private debt. 2000 figure is an estimate based on available monthly
data as of August.
6 Note that the ROKG does not release such data, so the 2000 figure is the estimated amount that Korea
is obligated to repay by the end of 2000. Also, the ROKG has announced that it will repay approximately $6
billion from useable foreign currency reserves in 2001.
7 2000 figure is as of the end of September 2000.
1. General Policy Framework
In 1999 and during the first half of 2000, the Korean economy rebounded sharply
from its unprecedented 1997–98 economic crisis, led mainly by buoyant domestic
consumption and investment and a surge in exports. In 1999 Korea’s gross domestic
product (GDP) grew 10.7 percent in real terms, propelled by strong recoveries in
principal industrial sectors, decisively reversing 1998’s 6.7 percent contraction, Ko-
rea’s worst performance since the Korean War. GDP growth was particularly im-
pressive in Q4 1999 (13 percent) and Q1 2000 (12.8 percent). In 2000 the Korean
economy is expected to grow eight to nine percent and considerably slower in 2001,
with inflation expected to remain in the three to four percent range, despite high
petroleum prices.
Korea’s 1997–98 financial crisis coincided with the election and inauguration of
President Kim Dae-Jung, who embraced as Korea’s best chance to recover a $58 bil-
lion International Monetary Fund (IMF) package, including loans from the IMF,
World Bank, and the Asia Development Bank. Under the IMF program, the Korean
government has taken steps to open its financial and equity markets to foreign in-
vestment and to reform and restructure its financial and corporate sectors to in-
crease transparency, accountability and efficiency. The Korean economy’s recovery,
although strong, is not yet firm or assured. Success depends on continued financial
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and corporate-sector restructuring to encourage a high pace of productive domestic
and foreign investment. Otherwise, existing high levels of domestic debt could
threaten economic performance. So far, however, rapid productivity increases and a
favorable yen-won exchange rate have kept exports strong.
Korea produces and exports advanced electronic components and telecommuni-
cations equipment, automobiles, steel, and a wide variety of mid-level, medium-qual-
ity consumer electronics and other goods. In the early 1990s, labor activism drove
up wages faster than productivity growth and Korea lost its low-wage labor advan-
tage to China and Southeast Asian countries. At the same time, Korea faced tough
competition from Japan and other advanced countries in exporting cutting-edge,
high-tech products.
Although the value of the won plunged from 800 won per dollar to nearly 2,000
won per dollar in late 1997, its value stabilized by 1999 to around the 1200 range.
Beginning in early 2000, the won strengthened further, and the average exchange
rate for 2000 is expected to be around 1,120 won per dollar. Korea’s useable foreign
currency reserves also grew to nearly $93 billion by September 2000. This strong
growth in foreign exchange reserves has reduced their external vulnerability, but
Koreans are still concerned about a narrowing trade surplus, as imports have in-
creased faster than exports. The Korean government has revised its trade surplus
estimate for 2000 to $10 billion, from its previous estimate of $12 billion.
The United States is a leading Korean trade partner, taking 21 percent of Korea’s
exports and providing 20 percent of Korea’s imports for the first eight months of
2000.
2. Exchange Rate Policy
Since the introduction of the IMF program in December 1997, foreign exchange
and capital controls have been greatly relaxed or abolished. In conjunction with IMF
program requirements, the exchange rate has been allowed to float (with Bank of
Korea intervention nominally limited to smoothing operations only.)
3. Structural Policies
In response to the 1997 financial crisis, the government has required greater cor-
porate transparency, fostered the development of small and medium-sized industries
and implemented broad-based reforms of the financial system. The financial system
reforms include substantial liberalization of capital markets, including the abolition
of restrictions on foreign ownership of domestic stock shares and bonds and on the
use of deferred payments to finance imports. Foreign banks can now establish sub-
sidiaries in Korea and foreign financial firms can participate in mergers and acqui-
sitions of domestic Korean financial institutions. Korea, however, requires foreign
branches to be separately capitalized, and other regulations such as prudential lend-
ing limits are based on local branch capital as opposed to a foreign bank’s total cap-
ital worldwide, while a domestic bank’s capital base is assessed as the entire bank’s
capital. Foreign banks are also disadvantaged in access to local currency funding.
The April 1999 Foreign Exchange Transaction Law, which will be fully implemented
at the end of 2000, significantly liberalized formerly heavily regulated capital trans-
actions.
Korea’s 1998 Foreign Investment Promotion Act streamlined foreign investment
application procedures and eased barriers to foreign direct investment across a
range of sectors. Korea now has a much more favorable investment climate for for-
eign firms, and in the longer run this should foster broader market access and im-
ports. Changes to the investment regime increased greatly and immediately levels
of foreign direct investment (FDI). FDI for the two years 1998 and 1999 exceeded
the total FDI that Korea received during the previous 37 years (1960–1997). Invest-
ment restrictions remain on 21 industrial sectors, of which only seven are entirely
closed. Mergers, including hostile mergers, are allowed, and most restrictions on for-
eign ownership of local shares have been lifted. For the first time in modern Korean
history, foreigners are now permitted to purchase real estate and property. Tax in-
centives, especially for the high technology sector, have been increased. Restrictions
on access to offshore funding (including offshore borrowing, intra-company transfers
and inter-company loans), however, continue to be burdensome. Foreign equity par-
ticipation limits, licensing requirements and other regulatory restrictions can limit
foreign direct investment in sectors nominally open to foreigners. Foreign firms also
face additional investment restrictions in many professional services sectors. The
United States and Korea are negotiating these and other investment issues in the
effort to conclude a bilateral investment treaty (BIT).
4. Debt Management Policies
At the end of August 2000, Korea’s total foreign debt (largely private sector) to-
taled $142 billion, up from $137 billion in 1999. Korea’s short-term debt as a per-
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48
centage of total foreign debt increased from 29 percent at the end of 1999 to 34 per-
cent at the end of August 2000.
5. Significant Barriers to U.S. Exports
During the 1990s, Korea has steadily liberalized its markets for goods and serv-
ices and substantially improved its investment climate for U.S. firms. Many protec-
tive tariffs were lowered or phased out as a result of bilateral negotiations, Uruguay
Round commitments and other multilateral efforts. Various nontransparent policies
and regulations, which directly or indirectly inhibited market access for imports,
were clarified or eliminated. The government rejected explicit policies that encour-
aged anti-import sentiment among Korean consumers and made efforts to address
residual anti-import biases among both Korean consumers and bureaucrats. How-
ever, anti-import campaigns by various consumer groups still take place on a recur-
ring basis, often instigated by the press, and are one of the most significant barriers
to increased U.S. exports. Introduced in late 1998, the new foreign investment re-
gime was aimed at attracting rather than tolerating foreign investment; total for-
eign investment in 2000 is expected to exceed $15 billion for the second straight
year. The net impact of these changes is that Korea is now an easier place to do
business than in the past; however, Korea is still a difficult market for foreign prod-
ucts in several key sectors, especially agriculture and automobiles. Problems also
exist in intellectual property rights protection (the issue is considered below in
greater detail).
Korea’s tariffs are generally modest; however, Korea’s 50.3 percent average tariff
for agricultural products contrasts sharply with the relatively low average tariff for
industrial products of 7.5 percent. This disparity gives some indication of the polit-
ical sensitivity of agricultural and fishery imports, which are further restricted by
quotas and tariff rate quotas (TRQ), as well as by the restrictive way that Korea
administers them. Several agricultural products of interest to U.S. suppliers, such
as rice and oranges, are directly impacted by these policies. Korea also uses adjust-
ment tariffs to respond to import surges; the majority of the 27 adjustment tariffs
apply to agricultural products. The government eliminated in June 1999 its import
diversification program, which barred certain imports from Japan, and has com-
mitted to phase out its eight GATT balance-of-payments restrictions by year-end
2000.
Nontariff barriers, which often result from non-transparent regulatory practices,
continue to inhibit imports to Korea across a range of sectors. A lack of regulatory
transparency and consistency can affect licensing, inspections, type approval, mark-
ing/labeling requirements and other standards. To add transparency and due proc-
ess to its regulatory system, in 1996, Korea enacted the Administrative Procedures
Act, but public notice of new regulations, as well as comment and transition periods,
is still not always adequate. The regulatory system does not consistently offer ade-
quate recourse to those adversely affected by creation of new regulations. In 1998
a comprehensive effort at regulatory reform, including the review of 11,000 regula-
tions, was initiated at the request of President Kim; it is not clear, however, that
the elimination of many of these regulations has had a significant effect on doing
business.
Products regulated for health and safety reasons (such as pharmaceuticals, med-
ical devices, and cosmetics) typically require additional testing or certification from
relevant ministries before they can be sold in Korea, resulting in considerable delays
and increasing costs. Although new reimbursement pricing and product approval
systems were recently put into place, the foreign pharmaceutical industry has faced
discriminatory barriers in Korea. Registration requirements for such products as
chemicals, processed food, medical devices and cosmetics hamper entry into the mar-
ket as well. Korea has initiated efforts to streamline its complex and burdensome
import clearance procedures, targeting some 54 laws for revision. It has committed
to bring its Food Code, Food Additive Code and labeling requirements into con-
formity with international standards, and has taken steps to do so. Import clear-
ance, however, still takes longer than in other Asian countries.
Despite potential conflict-of-interest problems, the government has delegated au-
thority to some Korean trade associations to carry out functions normally adminis-
tered by the government. Such delegation of responsibility may include processing
import approval documentation prior to customs clearance (allowing local trade as-
sociations to obtain business confidential information on incoming shipments), ad-
vertisement pre-approvals (providing early warning on the introduction of new prod-
ucts and on competitors’ marketing efforts), and a decision-making seat on various
committees (usually not available to foreign firms). The Korea Fair Trade Commis-
sion has made some efforts to reduce the quasi-legal, trade restrictive powers of a
number of associations.
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Korea’s automobile market remains effectively closed to foreign imports with only
2,401 imported cars sold in 1999, despite efforts by the Korean government to im-
prove the market environment for foreign automobiles. Pursuant to the October
1998 U.S.-Korea Memorandum of Understanding (MOU) on motor vehicles, Korea
lowered some taxes that had a discriminatory impact on imported cars, bound its
auto tariffs at eight percent, improved consumer financing of autos, and streamlined
standards and certification. Korea also has taken some steps to reduce anti-import
attitudes about the purchase of foreign automobiles, including the co-sponsorship of
the Seoul Import Motor Show in May 2000, but these steps have yet to have a
meaningful impact. In 2000 Korean imports of U.S. and other foreign cars are ex-
pected to barely exceed 4,000 units, which is far less than one percent of the mar-
ket.
The government requires theaters to show local movies for a minimum of 146
days each year, with some flexibility so that this total can be reduced to 106 days.
The quota acts as a deterrent to imported films, cinema construction, and the ex-
pansion of theatrical distribution. The Korean government, however, considers this
a cultural rather than a trade issue.
On January 1, 1997 Korea acceded to the WTO Government Procurement Agree-
ment (GPA). U.S. firms, however, continue to raise some concerns about Korean pro-
curement practices, including perceived discrimination against U.S. firms partici-
pating in procurements for Korea’s new Inchon International Airport. (However, the
WTO Dispute Settlement Board [DSB] formally ruled in July 2000 against U.S.
claims in this dispute).
Korea expanded its Uruguay Round minimum import quota for beef to 225,000
metric tons by the year 2000 as well as the proportion of the quota imported
through the ‘‘simultaneous buy/sell system.’’ Korea has committed to remove all re-
maining non-tariff barriers to beef imports, including state trading, by January
2001. However, due to a sharp drop in consumption, Korea has been unable to meet
its WTO minimum import commitment in recent years. In July 2000 the WTO DSB
ruled in favor of the United States concerning its complaints about import barriers
and distribution restrictions on foreign beef, but the ROKG announced its intentions
on September 11, 2000 to appeal certain issues of law and interpretation.
6. Export Subsidies Policies
In the past, Korea aggressively promoted exports through a variety of policy tools,
including export subsidies, directed credit and targeted industrial policy. However,
in the WTO, Korea committed to phasing out those subsidy programs not permitted
under the WTO Agreement on Subsidies and Countervailing Measures. Under the
IMF stabilization package, Korea eliminated four WTO prohibited subsidies. The
real benefit of the few remaining subsidized lines of export credit is insignificant
in a macroeconomic sense. The relative size of direct grants is small and declining
with regard to both the government budget and growing private investment. The
use of tax exemptions, the main vehicle for export promotion, appears to be declin-
ing as well. The government does expend large amounts of money in research and
development in key industrial sectors targeted for development, such as tele-
communications.
7. Protection of U.S. Intellectual Property
Korea is a participant in the WTO’s Agreement on Trade Related Aspects of Intel-
lectual Property (TRIPS). It is also a signatory to the World Intellectual Property
Organization (WIPO), the Universal Copyright Convention, the Budapest Treaty on
the International Recognition of the Deposit of Microorganisms, the Geneva
Phonograms Convention, the Paris Convention for the Protection of Industrial Prop-
erty, and the Patent Cooperation Treaty. Korea joined the Bern Convention in Au-
gust 1996.
Korean laws protecting IPR and related enforcement measures can be problem-
atic. Korea’s Special 301 status was upgraded from ‘‘Watch List’’ to ‘‘Priority Watch
List’’ in April 2000. Areas of continuing IPR concern include: protection of clinical
drug test data, pre-existing copyrighted works and pharmaceutical patents, lack of
coordination between Korean health and IPR authorities on drug product approvals
for marketing; and counterfeit consumer products. The United States also has ongo-
ing concerns about the consistency, transparency, and effectiveness of Korean en-
forcement efforts, particularly with regards to piracy of U.S. computer software and
books.
Korean patent law is fairly comprehensive, offering protection to most products
and technologies. However, it does not provide for effective pharmaceutical patent
protection, and approved patents of foreign patent holders are still seen as vulner-
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50
able to infringement. Likewise, U.S. industry believes that Korean courts are defi-
cient in terms of treatment and interpretation of its claims.
Since the early 1990s, the government’s protection of trademarks has improved.
A revised Trademark Law became effective March 1, 1998. The Design Act was also
revised on March 1, 1998, enhancing protection of industrial designs. The granting
of a trademark under Korean law is based on a ‘‘first-to-file’’ basis. While preemp-
tive and predatory filings are on the decline, ‘‘sleeper’’ preemptive registrations still
surface on occasion. A fairly new provision now allows the Korean Industrial Prop-
erty Office (KIPO) to reject suspected predatory applications based on a ‘‘bad faith’’
clause. There has been less success in stemming the export of Korean counterfeit
products globally.
Korea’s Copyright Law protects an author’s rights, but local prosecutors take no
action against infringement unless the copyright holder files a formal complaint.
Korea is in the process of amending its Computer Program Protection Act (again)
and is preparing revised copyright legislation so as to better meet its TRIPS obliga-
tions, especially with respect to copyright and trademark protection for transactions
conducted in the new information economy. Regarding the Computer Program Pro-
tection Act, U.S. concerns focus on the provisions relating to: 1) reverse engineering;
2) private use; 3) circumvention of technical protection measures; 4) compulsory reg-
istration of exclusive licenses; and 5) the requirement of a complaint for criminal
proceedings. Korea, however, is not in full compliance with provisions of the TRIPS
Agreement that stipulate that preexisting works and sound recordings must enjoy
a full term of protection (i.e., life of the author plus 50 years for works; 50 years
for sound recordings). Korea now only provides protection back to 1957. In 1999 the
Korean government devoted increased resources and staff to IPR enforcement activi-
ties, and President Kim himself directed cabinet agencies to step-up government ef-
forts to protect intellectual property. In 2000, however, such activities dropped off
precipitously, and IPR violations, especially of computer software, remain a problem.
8. Worker Rights
a. The Right of Association: With the exception of public sector employees, Korean
workers enjoy the right of free association. White-collar workers in the government
sector cannot join unions, but blue-collar employees in the postal service, railways,
and telecommunications sectors, and the national medical center have formed labor
organizations. Starting this year, government employees were allowed to form work-
place consultative councils. In July 1999 legislation went into effect allowing teach-
ers to form unions. Unions may be formed with as few as two members and without
a vote of the full prospective membership.
Labor law changes in 1997 authorized the formation of competing labor organiza-
tions in individual work sites beginning in the year 2002. Workers in government
agencies and defense industries do not have the right to strike. Unions in enter-
prises determined to be of ‘‘essential public interest,’’ including utilities, public
health, and telecommunications, may be ordered to submit to government-ordered
arbitration in lieu of striking. In fact, work stoppages occur even in these sensitive
sectors. The Labor Dispute Adjustment Act requires unions to notify the Labor Min-
istry of their intention to strike, and normally mandates a 10-day ‘‘cooling-off pe-
riod’’ before a work stoppage may legally begin.
b. The Right to Organize and Bargain Collectively: The Korean constitution and
the Trade Union Law provide for the right of workers to bargain collectively and
undertake collective action, but does not grant government employees, school teach-
ers or workers in defense industries the right to strike. Collective bargaining is
practiced extensively in virtually all sectors of the Korean economy. The central and
local labor commissions form a semi-autonomous agency that adjudicates disputes
in accordance with the Labor Dispute Adjustment Law. This law empowers workers
to file complaints of unfair labor practices against employers who interfere with
union organizing or practice discrimination against unionists. In 1998 the govern-
ment established the Tripartite Commission, with representatives from labor, man-
agement, and the government to deal with labor issues related to the economic
downturn. The work of the Commission made it legal for companies to lay off work-
ers due to economic hardship. Labor-management antagonism remains, and some
major employers remain strongly anti-union.
c. Prohibition of Forced or Compulsory Labor: The constitution provides that no
person shall be punished, placed under preventive restrictions, or subjected to invol-
untary labor, except as provided by law and through lawful procedures. Forced or
compulsory labor is not condoned by the government and is not known to occur.
d. Minimum Age for Employment of Children: The government prohibits forced
and bonded child labor and enforces this prohibition effectively. The Labor Stand-
ards Law prohibits the employment of persons under the age of 15 without a special
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51
employment certificate from the Labor Ministry. Because education is compulsory
through middle school (about age 14), few special employment certificates are issued
for full-time employment. Some children are allowed to do part-time jobs such as
selling newspapers. In order to obtain employment, children under 18 must have
written approval from their parents or guardians. Employers may only permit mi-
nors to work a limited number of overtime hours and are prohibited from employing
them at night without special permission from the Labor Ministry.
e. Acceptable Conditions of Work: The government implemented a minimum wage
in 1988 that is adjusted annually. The minimum wage in 1999 was set at 1,600 won/
hour ($1.34/hour, with $1 equal to an average of 1,189 won in 1999). Companies
with fewer than 10 employees are exempt from this law. The maximum regular
workweek is 44 hours, with provision for overtime to be compensated at a higher
wage, but such rules are sometimes ignored, especially by small-companies. The law
also provides for a maximum 56-hour workweek and a 24-hour rest period each
week. Labor laws were revised in 1997 to establish a flexible hours system that al-
lows employers to ask laborers to work up to 48 hours during certain weeks without
paying overtime so long as average weekly hours do not exceed 44. The govern-
ment’s health and safety standards are not always effectively enforced, but the acci-
dent rate continues to decline. The number of work-related deaths remains high by
international standards.
f. Rights in Sectors with U.S. Investment: U.S. investment in Korea is con-
centrated in petroleum, chemicals and related products, transportation equipment,
processed food, manufacturing and services. Workers in these industrial sectors
enjoy the same legal rights of association and collective bargaining as workers in
other industries.
Extent of U.S. Investment in Selected Industries—U.S. Direct Investment Position Abroad on an
Historical Cost Basis—1999
[Millions of U.S. Dollars]
Category Amount
Petroleum .......................................................................... 1,550
Total Manufacturing ......................................................... 3,651
Food and Kindred Products .......................................... 479
Chemicals and Allied Products .................................... 665
Primary and Fabricated Metals ................................... 25
Industrial Machinery and Equipment ......................... 409
Electric and Electronic Equipment .............................. 930
Transportation Equipment ........................................... 175
Other Manufacturing .................................................... 968
Wholesale Trade ............................................................... 810
Banking ............................................................................. 2,110
Finance/Insurance/Real Estate ........................................ 47
Services .............................................................................. 533
Other Industries ............................................................... 48
TOTAL ALL INDUSTRIES ............................................. 8,749
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
MALAYSIA
Key Economic Indicators
[Millions of U.S. Dollars unless otherwise indicated]
1998 1999 2000 1
Income, Production and Employment:
Nominal GDP ............................................................ 72,569 79,039 85,569
Real GDP Growth (pct) 2 ........................................... –7.4 5.8 7.5
GDP by Sector (1987 prices)
Agriculture ............................................................. 4,443 4,757 4,780
Manufacturing ....................................................... 12,984 15200 17,777
Mining And Petroleum .......................................... 3,680 3,677 3,700
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Key Economic Indicators—Continued
[Millions of U.S. Dollars unless otherwise indicated]
1998 1999 2000 1
Construction ........................................................... 1,871 1,822 1,878
Services ................................................................... 22,444 23,838 25,050
Government Services ............................................. 3,387 3,743 3,881
Per Capita GDP (US$) .............................................. 3,272 3,480 3,598
Labor Force (000s) ..................................................... 8,880 9,010 9,194
Money and Prices (annual percentage growth):
Money Supply Growth (M2)(pct) 3 ............................ 1.5 11.4 5.5
Consumer Inflation (pct) ........................................... 5.3 2.8 1.9
Exchange Rate (RM/US$ annual average) .............. 3.92 3.80 3.80
Balance of Payments and Trade:
Total Exports FOB .................................................... 71,925 84,521 97,229
Exports to United States 4 .................................... 19,001 21,428 24,369
Total Imports FOB .................................................... 54,321 61,160 76,551
Imports from United States 4 ................................ 8,952 9,079 10,562
Trade Balance ............................................................ 7,604 23,361 20,678
Balance with United States 4 ................................ 10,049 12,349 13,807
External Public Debt ................................................. 16,689 20,265 20,322
Fiscal Surplus/GDP (pct) .......................................... –1.8 –6.0 –4.9
Current Account Surplus/GDP (pct) ........................ 13.1 15.9 13.4
Debt Service Payments/GDP (pct) ........................... 5.2 6.4 N/A
Gold and Foreign Exchange Reserves 5 ................... 26,196 30,900 32,300
Aid from United States ............................................. 0.9 0.7 0.7
Aid from All Other Countries ................................... N/A N/A N/A
Note: All data converted at annual average exchange rates.
1 Malaysian Government estimates.
2 Calculated in Ringgit to avoid exchange rate changes.
3 As of August for 2000.
4 Annualized estimate on eight-month data from U.S. Department of Commerce for 2000.
5 As of October 23 for 2000.
1. General Policy Framework
Malaysia’s economy has rebounded from the 1997–1998 regional economic and fi-
nancial crisis. Following a 7.4 percent drop in real GDP in 1998, the economy reg-
istered 5.8 percent growth for 1999. The recovery picked up steam, and the govern-
ment estimates growth at 7.5 percent for 2000 and 7.0 percent for 2001. Malaysia’s
economic recovery has been export-led, based in large part on continuing strong
electronics exports to the United States, Malaysia’s principal trade and investment
partner, and government fiscal stimulus. Though consumer and investor confidence
has improved with the recovery, aggregate domestic consumption and investment
remain subdued. The government projects a budget deficit equal to 6.0 percent of
GNP during FY2000 and will continue its stimulative approach with a deficit equal
to 4.9 percent of GNP in FY2001.
To deal with a growing number of non-performing loans (NPLs) during the finan-
cial crisis, in 1998 the government established an asset management corporation,
Danaharta, and a special purpose vehicle, Danamodal, to inject funds into banks in
need of recapitalization. The government also created the Corporate Debt Restruc-
turing Committee (CDRC) to provide a framework for creditors and debtors volun-
tarily to resolve liquidity problems of viable businesses and serve as an alternative
to bankruptcy. Danaharta has removed approximately 43 percent of the NPLs from
the banking system and states it has completed the acquisition stage of the NPL
cleanup. CDRC has completed the first stages of the debt workout process for a sub-
stantial number of firms and reportedly hopes to complete its activities by the end
of 2000.
Danamodal has completed its outlays and is currently negotiating repayment
plans with five remaining client banks.
The government plays a strong, active role in the economy as investor, economic
planner, approver of investment projects and public and private procurement deci-
sions, as well as the author and implementor of domestic policies and programs. The
government actively seeks to bolster the economic status of the Malay and indige-
nous communities (commonly referred to as bumiputeras), in part through the
awarding of privatization contracts. The government holds equity stakes (generally
minority shares) in a wide range of domestic companies, usually large players in key
sectors, and can exert considerable influence over their operations. The economic
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downturn, however, slowed the push to privatization and increased emphasis on
government support for sensitive industries, such as automobiles, steel and public
transportation. The government has said it will consider granting assistance to trou-
bled corporations on the basis of three criteria: national interest, strategic interest,
and equity considerations under bumiputera policies.
Tariffs are the main instrument used to regulate the importation of goods in Ma-
laysia. However, 17 percent of Malaysia’s tariff lines (principally in the construction
equipment, agricultural, mineral, and motor vehicle sectors) are also subject to non-
automatic import licensing designed to protect import-sensitive or strategic indus-
tries. According to the Ministry of International Trade and Industry, the average
applied MFN tariff rate of Malaysia is approximately 9.18 percent. However, duties
for tariff lines where there is significant local production are often higher. For exam-
ple, 6.8 percent have tariff rates between 16 and 20 percent, 16.9 percent have tariff
rates that exceed 20 percent, and many lines have rates well over 100 percent.
The level of tariff protection is generally lower on raw materials and increases for
those goods with value-added content or which undergo further processing. The gov-
ernment urges Malaysians to purchase domestic products, instead of imports, when-
ever possible. In addition to import duties, a sales tax of 10 percent is levied on
most imported goods. Like import duties, however, this sales tax is not applied to
raw material and machinery used in export production. Malaysia has been an active
participant in multilateral and regional trade fora such as the World Trade Organi-
zation (WTO) and APEC (which it chaired in 1998).
Fiscal Policy: The government is pursuing an expansive fiscal policy in order to
stimulate economic growth. The government expects to run a budget deficit in 2001
of approximately 4.9 percent of GDP, down slightly from FY2000’s deficit, which was
equal to 6 percent of GDP. The FY2001 budget provides few new provisions to stim-
ulate consumption or investment. The Malaysian government finances domestically
the bulk of the deficit. In FY2001 the government expects to finance over $1 billion
from external sources.
Monetary Policy: The Central Bank continues its accommodative monetary policy,
featuring low interest rates to stimulate economic recovery. The government loos-
ened monetary policy in 1998, reducing reserve requirements from 13.5 percent as
of year-end 1997 to 4 percent in September 1998. The average base lending rate
dropped from 8.0 percent in December 1998 to 6.8 percent in August 1999. To en-
sure a positive return to depositors, the Malaysian government raised the deposit
rate slightly during 2000. Overall, high liquidity and relatively low interest rates
have helped stimulate a domestic economic recovery.
2. Exchange Rate Policy
As part of a broad effort to stabilize the currency while stimulating the economy,
on September 1, 1998 the government fixed the exchange rate of the Ringgit to the
dollar at RM 3.8/$1 and instituted selective capital controls, including a controver-
sial tax on repatriated principal and profits. Though the government continues its
fixed exchange rate policy, it has progressively relaxed capital controls until the re-
maining issue for foreign investors was a 10 percent exit levy on portfolio profits.
In the October 27, 2000 budget speech, the Finance Minister announced that the
government has dropped the levy on portfolio profits repatriated after one year. The
Finance Minister pointed out that the change rewards longer-term investment,
while maintaining the exit tax on profits earned through short term plays in Malay-
sian stocks.
3. Structural Policies
Pricing Policies: Most prices are market-determined but controls are maintained
on some key goods, such as vegetable oil, fuel, public utilities, cement, motor vehi-
cles, rice, flour, sugar, tobacco, and chicken. (Note: no restrictions are placed on
wheat imports).
Tax Policies: Tax policy is geared toward raising government revenue and discour-
aging consumption of ‘‘luxury’’ items. Income taxes, both corporate and individual,
comprise 40 percent of government revenue with indirect taxes, export and import
duties, excise taxes, sales taxes, service taxes and other taxes accounting for an-
other 31 percent. The remainder comes largely from dividends generated by state-
owned enterprises and petroleum taxes.
In contrast to the FY2000 budget, the FY2001 budget featured few new incentives
to stimulate consumption or investment. The new budget foresees a significant def-
icit, equal to 4.9 percent of GDP, down from last year’s deficit, which was equal to
6 percent of GDP. The FY2001 budget featured tax rebates to low income earners,
provisions permitting withdrawals from retirement accounts for housing purchases,
tax deductions for companies buying computers to give to their employees and new
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deductions for investments in start-up companies. The budget also provided $132
million to create a new venture capital fund and $316 million for worker training.
Standards: Malaysia has extensive standards and labeling requirements, but
these appear to be largely implemented in an objective, nondiscriminatory fashion.
Food product labels must provide ingredients, expiry dates and, if imported, the
name of the importer. Electrical equipment must be approved by the Ministry of
International Trade and Industry; telecommunications equipment must be ‘‘type ap-
proved’’ by the Communications and Multimedia Commission. Telecommunications
and aviation equipment must be approved by the Department of Civil Aviation.
Pharmaceuticals must be registered with the Ministry of Health. In addition, the
Standards and Industrial Research Institute of Malaysia provides quality and other
standards approvals.
4. Debt Management Policies
Malaysia’s medium and long-term foreign debt (both public and private sector)
amounted to $36 billion at the end of 1999, equal to about 46 percent of GDP. Al-
most all of the medium and long-term debt was granted on concessional terms.
Short-term external debt continues to decline. In 2000 short-term debt totaled ap-
proximately $5.2 billion, down from $6.3 billion in 1999. Malaysia’s debt service
ratio declined from a peak of 18.9 percent of gross export earnings in 1986 to 6.9
percent in 1998, to 6.1 percent in 2000.
5. Aid
U.S. government assistance to Malaysia in FY2000 falls into three broad cat-
egories: the Trade Development Agency (TDA), approximately $250,000; the Inter-
national Military Education Training (IMET) program, $700,000; and the U.S.-Asia
Environment Program (U.S.–AEP), $304,000. Although statistics are not available
for assistance provided from other governments, the Japanese government has since
1998 extended the following forms of financial assistance to help Malaysia recover
from the economic crisis: Japanese Government Office of Developmental Assistance
(ODA) Yen Loan Projects of approximately $2.2 billion; Japanese Ex-Im Bank loans
of approximately $900 million, of which $600 million is co-financed with commercial
banks; Ex-Im Bank guaranteed commercial bank loans of approximately $700 mil-
lion; Japanese government guaranteed commercial bank loans of approximately
$560 million; and a short-term financing facility of up to $2.5 billion. (Note: in Octo-
ber 1999 Japan’s Overseas Economic Cooperation Fund, which implemented ODA
yen loans, and Ex-Im Bank merged to create the Japan Bank of International Co-
operation [JBIC], which now administers former ODA and Ex-Im loans).
6. Significant Barriers to U.S. Exports
Import Restrictions on Motor Vehicles: Malaysia maintains several measures to
protect the local automobile industry, including high tariffs and an import quota
and licensing system on imported motor vehicles and motor vehicle parts. Malaysia
also maintains local content requirements of 45 to 60 percent for passenger and
commercial vehicles, and 60 percent for motorcycles. Arguing that the national car
industry requires additional time to become competitive internationally as a result
of the regional financial crisis, Malaysia has requested additional time before reduc-
ing or abolishing these measures. Malaysia has requested a two-year extension of
the phaseout period for local content requirements in selected auto industry sectors
that are inconsistent with its obligations under the WTO Agreement on Trade-Re-
lated Investment Measures (TRIMS) (see investment barriers). Further, ASEAN has
accepted Malaysia’s request for an extension of its commitments under the ASEAN
Free Trade Area (AFTA) to reduce tariffs in the auto sector beginning in 2000.
These restrictions have hampered the ability of U.S. firms to penetrate the Malay-
sian market. Customs tariffs and excise duties (up to 50 percent) for motorcycles
are also significant barriers for U.S. companies. Malaysia is also considering new
emissions standards for motorcycles that could restrict market opportunities for im-
ports.
Products Tariff (pct)
Automobiles (CB) ................................................................................... 140–300
Automobiles (CKD) ................................................................................ 80
Vans (CBU) ............................................................................................ 42–140
Van (CKD) .............................................................................................. 40
4WD/ Multipurpose (CBU) .................................................................... 60–200
4WD/ Multipurpose (CKD) .................................................................... 40
Motorcycle (CBU) ................................................................................... 80–120
Motorcycle (CKD) ................................................................................... 30
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Restrictions on Construction Equipment: In October 1997 Malaysia imposed a re-
strictive licensing regime on imports of heavy construction equipment and raised
import duties for the second year in a row, as detailed below. In October 1996 it
raised duties on construction equipment from 5 to 20 percent. In addition, the initial
capital allowance for imported heavy equipment will be reduced from 20 to 10 per-
cent in the first year, and the annual allowance will be reduced from between 12
percent and 20 percent to 10 percent. In April 1999 another licensing requirement
was established for certain iron and steel products.
Products Tariff (pct)
Heavy Machinery and Equipment ........................................................ 5
Multi-Purpose Vehicles ......................................................................... 50
Special Purpose Vehicles ....................................................................... 50
Construction Materials .......................................................................... 10–30
Duties on High Value Food Products: Duties for processed and high value prod-
ucts, such as canned fruit, snack foods, and many other processed foods, range be-
tween 20 and 30 percent. The applied tariff on soy protein concentrate is 20 percent.
Duties on Alcoholic Beverages and Tobacco Products: In 1999 excise duties were
increased on tobacco products (now ranging from $10.50 to $48/kg) and alcoholic
beverages (e.g., vermouth in retail-sized containers is subject to a specific tariff of
$31.50/dal). In the 2001 budget, the government announced increases in the sales
taxes for tobacco from 15 to 25 percent and alcohol from 15 to 20 percent.
Plastic Resins: U.S. exports of some plastic resins are hampered by 20 percent
tariffs. Additional measures may be forthcoming. In October 2000 the Plastic Resins
Producers Group of the Malaysian Petrochemicals Association requested government
help in overcoming the combined effect of high feedstock resins and cheaper im-
ported resins.
Tariff Rate Quota for Chicken Parts: Although the government applies a zero im-
port duty on chicken parts, imports are regulated through licensing and sanitary
controls, and import levels remain well below the minimum access commitments es-
tablished during the Uruguay Round.
Float Glass Tariff Differentials: Malaysia levies high duties (30 to 60 percent ad
valorem equivalent) on rectangular-shaped float glass. Nearly all float glass that
moves in world trade is rectangular. To qualify for the lower ad valorem MFN tariff
rate of 30 percent levied on non-rectangular float glass, exporters often must resort
to time-consuming, wasteful procedures such as cutting off one or more corners or
cutting one edge in a slanted fashion. This is an inefficient and expensive process
that requires distributors to recut each piece of glass into a rectangular shape once
it has cleared customs.
Rice Import Policy: The sole authorized importer of rice is a government corpora-
tion with the responsibility of ensuring purchase of the domestic crop and wide
power to regulate imports.
Film and Paper Product Tariff: Malaysia applies a 25 percent tariff on imported
instant print film that is estimated to cause an annual trade loss of $10 to $25 mil-
lion for the U.S. industry. In August 1994 the government raised tariffs on several
categories of imported kraft linerboard (used in making corrugated cardboard boxes)
to between 20 and 30 percent depending on the category. These tariff increases are
to be phased out after five years and are subject to review every two years. Malaysia
did not change the tariff levels after the 1996 review. Effective in February 2000,
Malaysia increased the tariff on newsprint (rolls and sheets) to 10 percent.
Direct Selling Companies: In May 1999 the Malaysian government announced
new requirements for the licensing and operation of direct selling companies. These
requirements include the provisions that: a) no more than 30 percent of the locally
incorporated company can be foreign owned, b) local content of products should be
no less than 80 percent, c) no new products would be approved for sale that did not
meet local content requirements, and d) all price increases would be approved by
the Ministry of Domestic Trade and Consumer Affairs. These guidelines also spell
out the conditions under which companies may receive one, two and three year oper-
ating licenses. The Ministry indicated that the local content targets are not manda-
tory, except for adherence to Malaysia’s national equity policy. In May 2000 the
Minister of Domestic Trade and Consumer Affairs announced that license issuance
for direct selling companies would be frozen pending a review of existing licenses
and company operations. In October 2000 the Minister announced its intention to
limit new licenses with the aim of reducing the number of direct selling companies.
The proposed conditions include requirements for higher paid-up capital, marketing
plans and product quality.
Government Procurement: Malaysian Government policy calls for procurement to
be used to support national objectives such as encouraging greater participation of
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ethnic Malays (bumiputeras) in the economy, transfer of technology to local indus-
tries, reducing the outflow of foreign exchange, creating opportunities for local com-
panies in the services sector, and enhancing Malaysia’s export capabilities. As a re-
sult, foreign companies do not have the same opportunity as some local companies
to compete for contracts and in most cases foreign companies are required to take
on a local partner before their bid will be considered. Some U.S. companies have
voiced concerns about the transparency of decisions and decision-making processes.
Malaysia is not a party to the plurilateral WTO Government Procurement Agree-
ment.
Investment Barriers: Malaysia encourages direct foreign investment particularly
in export-oriented manufacturing and high-tech industries, but retains considerable
discretionary authority over individual investments. Especially in the case of invest-
ments aimed at the domestic market, it has used this authority to restrict foreign
equity (normally to 30 percent) and to require foreign firms to enter into joint ven-
tures with local partners. To alleviate the effects of the economic downturn, Malay-
sia announced relaxation (until December 31, 2000) of foreign-ownership and export
requirements in the manufacturing sector for companies producing goods that do not
compete with local producers. Most foreign firms face restrictions in the number of
expatriate workers they are allowed to employ.
Trade-Related Investment Measures: Malaysia has notified the WTO of certain
measures that are inconsistent with its obligations under the WTO agreement on
Trade-Related Investment Measures (TRIMS). The measures deal with local content
requirements in the automotive sector. New projects or companies granted ‘‘pioneer
status’’ are eligible to receive a 70 percent income tax exemption. Proper notification
allows developing-county WTO members to maintain such measures for a five-year
transitional period after entry into force of the WTO. Malaysia was scheduled to
eliminate these measures before January 1, 2000. In December 1999 Malaysia re-
quested a two-year extension of the phase-out period. The United States is working
in the WTO committee on TRIMS to ensure that WTO members meet its obliga-
tions.
Services Barriers: Under the WTO basic telecommunications agreement, Malaysia
made commitments on most basic telecommunications services and partially adopt-
ed the reference paper on regulatory commitments. Malaysia guaranteed market ac-
cess and national treatment for these services only through acquisition of up to 30
percent of the shares of existing licensed public telecommunications operators, and
limits market access commitments to facilities-based providers. At least two U.S.
firms have investments in basic and enhanced services sectors.
Professional Services: Foreign professional services providers are generally not al-
lowed to practice in Malaysia. Foreign law firms may not operate in Malaysia except
as minority partners with local law firms, and their stake in any partnership is lim-
ited to 30 percent. Foreign lawyers may not practice Malaysian law or operate as
foreign legal consultants. They cannot affiliate with local firms or use their inter-
national firm’s name.
Under Malaysia’s registration system for architects and engineers, foreign archi-
tects and engineers may seek only temporary registration. Unlike engineers, Malay-
sian architectural firms may not have foreign architectural firms as registered part-
ners. Foreign architecture firms may only operate as affiliates of Malaysian compa-
nies. Foreign engineering companies must establish joint ventures with Malaysian
firms and receive ‘‘temporary licensing,’’ which is granted only on a project-by-
project basis and is subject to an economic needs test and other criteria imposed
by the licensing board. Foreign accounting firms can provide accounting or taxation
services in Malaysia only through a locally registered partnership with Malaysian
accountants or firms, and aggregate foreign interests are not to exceed 30 percent.
Auditing and taxation services must be authenticated by a licensed auditor in Ma-
laysia. Residency is required for registration.
Banking: No new licenses are being granted to either local or foreign banks; for-
eign banks must operate as locally controlled subsidiaries. Foreign-controlled com-
panies are required to obtain 60 percent of their local credit from Malaysian banks.
Insurance branches of foreign insurance companies were required to be locally incor-
porated by June 30, 1998; however, the government has granted extensions to that
requirement. Foreign shareholding exceeding 49 percent is not permitted unless the
Malaysian Government approves higher shareholding levels. As part of Malaysia’s
WTO financial services offer, the government committed itself to allow existing for-
eign shareholders of locally incorporated insurance companies to increase their
shareholding to 51 percent once the WTO Financial Services Agreement goes into
effect in 1999. New entry by foreign insurance companies is limited to equity par-
ticipation in locally incorporated insurance companies and aggregate foreign
shareholding in such companies shall not exceed 30 percent.
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Securities: Foreigners may hold up to 49 percent of the equity in a stockbroking
firm. Currently there are 11 stockbroking firms that have foreign ownership and 20
representative offices of foreign brokerage firms. Fund management companies may
be 100 percent foreign-owned if they provide services only to foreign investors, but
they are limited to 70 percent foreign-ownership if they provide services to both for-
eign and local investors.
Advertising: Foreign film footage is restricted to 20 percent per commercial, and
only Malaysian actors may be used. The government has an informal and vague
guideline that commercials cannot ‘‘promote a foreign lifestyle.’’ Advertising of alco-
hol products is severely restricted.
Television and Radio Broadcasting: The government maintains broadcast quotas
on both radio and television programming. Sixty percent of television programming
is required to originate from local production companies owned by ethnic Malays.
This share is scheduled to increase to 80 percent by the end of 2000. Sixty percent
of radio programming must be of local origin. The Ministry of Information an-
nounced in January 1998 that it would study the use of the Broadcasting Act of
1988 as the means of imposing further conditions on TV stations to provide addi-
tional air time to local programming.
Other Barriers: U.S. companies have indicated that they would welcome improve-
ments in the transparency of government decision-making and procedures, and lim-
its on anti-competitive practices. A considerable proportion of government projects
and procurement are awarded without transparent competitive bidding. The govern-
ment has declared that it is committed to fighting corruption and maintains an
Anti-Corruption Agency (a part of the office of the Prime Minister) to promote that
objective. The agency has the independent power to conduct investigations and is
able to prosecute cases with the approval of the Attorney General.
7. Export Subsidies Policies
Malaysia offers several export allowances. Under the export credit refinancing
scheme operated by the central bank, commercial banks and other lenders provide
financing to exporters at a preferential interest rate for both post-shipment and pre-
shipment credit. Malaysia also provides tax incentives to exporters, including double
deduction of expenses for overseas advertising and travel, supply of free samples
abroad, promotion of exports, maintaining sales offices overseas, and research on ex-
port markets. To spur exports, 70 percent of the increased export earnings by inter-
national trading companies has been exempted from taxes.
8. Protection of U.S. Intellectual Property
Malaysia is a member of the World Intellectual Property Organization (WIPO),
the Bern Convention, and the Paris Convention. Malaysia provides copyright protec-
tion to all works published in Bern Convention member countries regardless of
when the works were first published in Malaysia. Malaysia is also a member of the
WTO and was scheduled to meet its obligations under Trade Related Intellectual
Property Agreement (TRIPS) on January 1, 2000. In 2000 the Malaysian govern-
ment passed a number of new laws and amendments to existing legislation in order
to bring Malaysia into compliance with its TRIPS obligations. New legislation on
plant varieties is still being drafted.
As the number of manufacturing licenses for CDs has increased, so have piracy
rates for music and video discs. Malaysia’s production capacity for CDs far exceeds
local demand plus legitimate exports, and pirated products believed to have origi-
nated in Malaysia have been identified throughout the Asia-Pacific region, North
America, South America, and Europe. The International Intellectual Property Asso-
ciation (IIPA) estimates 1999 industry losses in Malaysia due to piracy at $286.8
million. IIPA estimates 1999 piracy rates at 71 percent for business software, 99
percent for entertainment, and 85 percent for movies. In April 2000 the United
States Trade Representative (USTR) placed Malaysia on the Special 301 Priority
Watch List for its failure to substantially reduce pirated optical disc production and
export.
The Malaysian Government is aware of the problem and has expressed its deter-
mination to move against illegal operations. The Prime Minister and his cabinet
have publicly spoken out about the need to improve IPR protection. A special task
force, chaired by the Minister of Domestic Trade and Consumer Affairs, includes
representatives from all ministries and agencies with responsibility for IPR. Govern-
ment and industry cooperation has expanded. For example, in July 2000, the Min-
istry and the Business Software Alliance (BSA) launched ‘‘Crackdown 2000’’ tar-
geting corporate use of unlicensed software.
In April 2000 the Malaysian Parliament passed amendments to the Copyright
Act, the Patents Act, and the Trademarks Act, as well as legislation on layout de-
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signs of integrated circuits and geographical indications. In September 2000 the
Ministry of Domestic Trade and Industry gazetted the Optical Disc Act 2000 estab-
lishing a licensing and regulatory framework for manufacturing copyrighted work
and to control piracy. Manufacturers are required to obtain licenses from both the
Ministry of International Trade and Industry and the Ministry of Domestic Trade
and Consumer Affairs. Manufacturers have been given six months to comply with
the new act.
Suppressing CD-based digital piracy is consistent with the government’s objective
to establish the Multimedia Super Corridor as the preeminent locus of high-tech-
nology manufacturing and innovation in Asia. Police and legal authorities are gen-
erally responsive to requests from U.S. firms for investigation and prosecution of
copyright infringement cases. However, despite thousands of raids and inspections
since April 1999, no one has been criminally prosecuted for piracy. Notwithstanding
these efforts of the government, illegal production of optical disks remains a signifi-
cant problem in Malaysia, and its effects have been observed throughout the region.
Trademark infringement and patent protection have not been serious problem
areas in Malaysia for U.S. companies in recent years.
9. Worker Rights
a. The Right of Association: By law most workers have the right to engage in
trade union activity, but less than 10 percent of the work force is represented by
one of Malaysia’s 544 trade unions. Exceptions include certain categories of workers
labeled ‘‘confidential’’ and ‘‘managerial and executives,’’ as well as police and defense
officials. No legal barrier prevents foreign workers from joining a trade union, but
the Immigration Department places conditions on foreign workers’ permits that ef-
fectively bar the workers from joining a trade union. Government policy places a de
facto ban on the formation of national unions in the electronics sector, but allows
enterprise-level unions,
b. The Right to Organize and Bargain Collectively: Workers have the legal right
to organize and bargain collectively, and collective bargaining is widespread in those
sectors where labor is organized. However, severe restrictions on the right to strike
weaken collective bargaining rights. The law requires that the parties to a labor dis-
pute submit to a system of compulsory adjudication. Thus, though theoretically
legal, strikes are extremely rare.
c. Prohibition of Forced or Compulsory Labor: The constitution prohibits forced or
compulsory labor, and the government enforces this prohibition. There is no evi-
dence that forced or compulsory labor occurs in Malaysia except for rare cases that,
when discovered, are prosecuted vigorously by the government.
d. Minimum Age for the Employment of Children: Malaysian law prohibits the em-
ployment of children younger than the age of 16. The law permits some exceptions,
such as light work in a family enterprise, work in public entertainment, work per-
formed for the government in a school or training institutions, or work as an ap-
proved apprentice. In no case does the law permit children to work more than six
hours per day, or more than six days per week, or at night. Child labor occurs, but
there is no reliable recent estimate of the number of child workers. Most child labor-
ers work in the plantation sector, assisting parents with the physical labor, but not
receiving a wage. Child labor can also be found in urban areas in family-run food
businesses, night markets and small-scale manufacturing.
e. Acceptable Conditions of Work: There is no minimum wage, but prevailing
wages generally provide an acceptable standard of living. Malaysian law stipulates
working hours, mandatory rest periods, overtime rates, holidays, and other labor
standards. The government enforces these standards. Working conditions and occu-
pational safety concerns are considerably worse in the plantation sector. An occupa-
tional safety law provides some protections, but there are no specific statutory or
regulatory provisions that provide a right for workers to remove themselves from
a dangerous workplace without arbitrary dismissal.
f. Rights in Sectors with U.S. Investment: U.S. companies invest widely in many
sectors of the Malaysian economy. Worker rights in sectors in which there is U.S.
investment generally do not differ from those in other sectors. U.S. companies invest
heavily in the electronics sector, in which workers’ right to organize is limited to
enterprise-level unions.
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Extent of U.S. Investment in Selected Industries in Malaysia—U.S. Direct Investment Position
Abroad on an Historical Cost Basis—1999
[Millions of U.S. Dollars]
Category Amount
Petroleum .......................................................................... 1,041
Total Manufacturing ......................................................... 3,555
Food and Kindred Products .......................................... 5
Chemicals and Allied Products .................................... 253
Primary and Fabricated Metals ................................... –6
Industrial Machinery and Equipment ......................... 419
Electric and Electronic Equipment .............................. 2,589
Transportation Equipment ........................................... 0
Other Manufacturing .................................................... 296
Wholesale Trade ............................................................... 139
Banking ............................................................................. 440
Finance/Insurance/Real Estate ........................................ 483
Services .............................................................................. 343
Other Industries ............................................................... –13
TOTAL ALL INDUSTRIES ............................................. 5,989
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
PHILIPPINES
Key Economic Indicators
[Billions of U.S. Dollars unless otherwise indicated]
1998 1999 2000 1
Income, Production and Employment:
Nominal GDP ............................................................ 65.5 76.7 73.8
Real GDP Growth (pct) 2 ........................................... –0.6 3.3 3.7
Nominal GDP by Sector:
Agriculture ............................................................. 11.4 13.5 11.8
Manufacturing ....................................................... 14.3 16.5 16.1
Services ................................................................... 33.6 39.8 39.5
Government 3 .......................................................... 8.3 9.5 9.1
Per Capita GDP (US$) .............................................. 905 1,039 980
Labor Force (000s) ..................................................... 31,056 32,081 32,300
Unemployment Rate (pct) ......................................... 10.1 9.6 11.0
Money and Prices (annual percentage growth):
Money Supply Growth (M2) 4 ................................... 8.0 19.3 8.5
Consumer Price Inflation (pct) ................................. 9.7 6.6 4.5
Exchange Rate (Peso/US$ annual average) Inter-
bank Rate ............................................................... 40.89 39.09 44.00
Balance of Payments and Trade:
Total Exports FOB 5 .................................................. 29.5 35.0 39.9
Exports to United States 6 .................................... 11.9 12.4 13.9
Total Imports FOB 5 .................................................. 29.5 30.7 32.6
Imports from United States 6 ................................ 6.7 7.2 7.7
Trade Balance 5 ......................................................... –0.03 4.3 7.3
Balance with United States 6 ................................ 5.2 5.2 6.7
Current Acct. Surplus or Deficit/GDP (pct) ............ 2.4 10.3 11.8
External Public Sector Debt ..................................... 30.3 34.8 35.5
Foreign Debt Service Payments/GDP (pct) ............. 7.8 7.8 8.7
Nat’l Gov. Fiscal Surplus or Deficit/GDP (pct) ....... –1.9 –3.7 –2.8
Gold and Foreign Exchange Reserves ..................... 10.8 15.1 15.7
Aid from United States (US$ millions) 7 ................. 48.0 70.0 34.0 8
Aid from Other Bilateral Sources (US$ millions) 7 1,020.0 1,127.0 599.0 8
1 Figures for 2000 are full-year estimates based on data available as of October.
2 Percentage changes based on local currency.
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3Government construction and services gross value added.
4 Growth rates of year-end M2 levels.
5 Merchandise trade (Philippine government data).
6 Source: U.S. Department of Commerce; exports FAS, imports customs basis; 2000 figures are estimates
based on data available through October 2000.
7 Inflows per Philippine government balance of payments data, excluding inflows from the U.S. Veterans
Administration (USVA).
8 Actual January–June 2000 figures.
Sources: National Economic and Development Authority, Bangko Sentral ng Pilipinas, Department of Fi-
nance.
1. General Policy Framework
Preliminary results of the 2000 government census placed the Philippines’ popu-
lation count at 75.3 million, and the country’s annual population growth rate be-
tween the 1995 and 2000 census years at two percent. Agriculture contributes only
20 percent of GDP but absorbs 40 percent of employment. Electronics, garments,
and auto parts are the leading merchandise exports, but rely heavily on imported
inputs. Overseas workers remittances, estimated at $5–6 billion yearly, are a major
source of foreign exchange. The balance of payments historically has registered cur-
rent account surpluses (including those since the Asian crisis) only during periods
of lethargic economic growth and weak import demand. The domestic savings rate
is relatively low, compared to the rest of Asia, estimated at barely 20 percent of
GDP in 1999.
Weak public finance is a long-standing problem. After four consecutive surpluses
(1994–1997), the national government has reverted to deficit-spending since 1998,
partly as a response to the Asian financial crisis. The government perennially has
problems containing its fiscal gap because revenues suffer from weak tax adminis-
tration and collection while efforts to contain expenditures are hampered by the
large share (over 70 percent) of ‘‘non-discretionary’’ expenditures such as payroll
costs, interest payments and mandated transfers to local government units. Fiscal
difficulties make it extremely difficult for the government to address the country’s
urgent infrastructure, health and education needs, and complicate government ef-
forts to manage domestic interest rates.
Open market operations serve as the main policy tool to control money supply.
The Bangko Sentral is working to shift from a base money to inflation-targeting
framework in 2001 to better fulfill its price stabilization mandate.
Although nationalist groups and vested interests pose obstacles to the scope and
pace of reforms, President Estrada has signed several economic reform bills into
law. These include the Retail Trade Liberalization Act, General Banking Law, Secu-
rities Regulation Code, and the Electronic Commerce Act. The Philippine Congress
is also moving forward on proposed legislation to restructure the power sector and
privatize the government-owned National Power Corporation.
2. Exchange Rate Policy
There are generally no restrictions to full and immediate capital repatriation and
profit remittances, foreign debt servicing, and the payment of royalties, lease pay-
ments and similar fees. In January 2000 the Bangko Sentral ng Pilipinas (Central
Bank [BSP]) moved to curb foreign exchange speculation and volatility by requiring
a minimum holding period for foreign investments registered as peso time deposits.
There are no mandatory foreign exchange surrender requirements imposed on ex-
port earners and foreign exchange can be freely bought and sold outside the banking
system. The exchange rate is not fixed and generally evolves freely in the interbank
market, although the BSP imposes limits on banks’ foreign exchange positions. The
depreciation of the peso during the Asian financial crisis (from peso 26/dollar in
June 1997 to weaker than peso 50/dollar at present) has hurt the competitiveness
of some U.S. exports.
3. Structural Policies
Prices are generally determined by market forces, although basic public services
(such as transport, water and electricity) are regulated by the government. Govern-
ment regulation of prices of ‘‘socially sensitive’’ petroleum products (i.e., liquefied pe-
troleum gas, regular gasoline, and kerosene) legally ended in July 1998 with the full
deregulation of the oil industry. However, over the past year, the government has
responded to public opposition to oil price increases by occasionally applying moral
suasion on oil companies to limit, delay or stagger fuel price adjustments, resulting
in alleged cost under-recoveries. The government’s National Food Authority remains
a major factor in the market for rice and other agricultural products.
While progress in investment liberalization has been substantial, important bar-
riers to foreign entry remain. Two ‘‘negative lists’’ outline where investment is re-
stricted. Divestment requirements exist for firms seeking certain investment incen-
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tives. A number of other laws specify, or have the effect of imposing, local sourcing
requirements.
Almost all products, including imports, are subject to a 10 percent value added
tax. Certain products, whether domestically manufactured or imported, are subject
to excise tax. The Philippines’ Tariff Reform Program is gradually lowering applied
duty rates on nearly all items, toward a goal of tariff rates of zero to five percent
by 2004 for all items except sensitive agricultural products.
4. Debt Management Policies
Foreign debt (estimated at $52.2 billion as of June 2000) has been growing, but
debt servicing is no longer a severe problem. The ratio of debt service payments to
exports of goods and services was 13.7 percent during the first half of 2000, com-
pared to 40 percent in the early 1980s. The bias for medium- to long-term loans
(which comprise more than 85 percent of external liabilities) and relatively small
(25 percent) share of the private, non-bank sector have been advantages in coping
with the Asian financial crisis. Concessional credits from multilateral and official bi-
lateral lenders account for about half of the country’s external debt.
The Philippines had four debt rescheduling rounds with official bilateral (Paris
Club) creditors and did not exercise a fifth Paris Club debt rescheduling agreement.
The Philippines had hoped to end over three decades of International Monetary
Fund (IMF) supervision in March 1998, but opted for a two-year precautionary ar-
rangement due to the regional currency crisis. The Estrada administration con-
verted this program to a regular $1.4 billion standby arrangement in August 1998.
The standby program should have concluded in March 2000 but was twice extended
(most recently to December 2000) to give the government more time to improve its
fiscal performance and complete promised reforms (including legislation to restruc-
ture the energy sector). The government has indicated it may explore a follow-
through monitoring arrangement when the current program ends.
While regulations have substantially eased, the Bangko Sentral ng Pilipinas con-
tinues to monitor and/or regulate foreign borrowing to ensure that they can be serv-
iced with due regard for the economy’s overall debt servicing capacity. Certain loans
of the private sector must be approved by the Bangko Sentral regardless of matu-
rity, the source of foreign exchange for debt service and/or any other consideration.
These are: private sector debts guaranteed by the public sector, or covered by forex
guarantees issued by local banks; loans granted by foreign currency deposit units
funded from or collateralized by offshore loans or deposits; and loans with matu-
rities of more than one year obtained by private banks and financial institutions for
relending.
5. Significant Barriers to U.S. Exports
Tariffs: Imported items that are not locally produced generally face low tariffs,
while intermediate products and raw materials produced locally are generally as-
sessed duties of seven or ten percent. Finished products, which compete with locally-
produced goods face higher tariffs of between 15 to 30 percent. Imports of finished
automotive vehicles (completely built-up units) are subject to a 30 percent tariff,
currently the highest duty rate applied to a non-agricultural product, as an incen-
tive to promote local assembly under the Philippines Motor Vehicle Development
Program. In January 1999 President Estrada signed Executive Order (E.O.) 63 rais-
ing applied MFN tariff rates on a range of products including yarns, threads, fabric,
apparel, and kraft liner paper. Rates on these items were reduced to their 1997 lev-
els of 10 to 20 percent beginning January 1, 2000. The Philippines maintains high
tariff rates of 35 to 65 percent on sensitive agricultural products, including grains,
livestock and meat products, sugar, certain vegetables, and coffee. Overall, the
unweighted average nominal tariff rate of 9.98 percent in 1999 has been lowered
to 8.08 percent since January 1, 2000.
Import Licenses: The National Food Authority (NFA), a government entity, is the
sole importer of rice and continues to be involved in imports of corn. Fisheries Ad-
ministrative Order (FAO) 195, series of 1999, issued by the Department of Agri-
culture, requires a license to import fresh, chilled, and frozen fish when intended
for sale in local retail markets. E.O. 209 of February 2000 requires an eligible com-
mercial fishing vessel operator to obtain an Authority to Import from the Maritime
Industry Authority prior to tax and duty-free importation of fishing vessels or boats.
Subject to other import regulations are certain other items, including firearms and
ammunition, used clothing, sodium cyanide, chlorofluorocarbon (CFC) and other
ozone-depleting substances, penicillin and derivatives, coal and derivatives, color re-
production machines, chemicals for the manufacture of explosives, pesticides, used
motor vehicles, and used tires. In addition, certain agricultural commodities are sub-
ject to minimum access volume tariff-rate quotas.
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Excise Taxes: U.S. producers of automobiles and distilled spirits have raised con-
cerns about certain discriminatory aspects of the Philippines’ excise tax system. Ex-
cise taxes on distilled spirits impose a lower tax on products made from materials
that are indigenously available (e.g., coconut, palm, sugar cane). The excise tax
treatment of automotive vehicles is based on engine displacement, rather than vehi-
cle value.
Services Barriers: In the field of banking, May 1994 amendments to the 1948
General Banking Act (GBA) allowed a maximum of ten foreign banks to establish
foreign branches in the country. Foreign branch banks are limited to opening six
branches each. The General Banking Law of 2000 (signed in May 2000 to succeed
the GBA) opened a seven-year window during which foreign banks may own up to
100 percent of one locally-incorporated commercial or thrift bank (up from the pre-
vious 60 percent foreign equity ceiling, with no obligation to divest). However, for
the first three years, such foreign investment may be made only in existing banks,
reflecting the Bangko Sentral’s current emphasis on banking sector consolidation.
Regulations require that majority Filipino-owned domestic banks control, at all
times, at least 70 percent of total banking system assets. Rural banking remains
completely closed to foreigners.
Securities: Membership in the Philippine stock exchange is open to foreign-con-
trolled stock brokerage firms that are incorporated under Philippine laws. Foreign
ownership in securities underwriting companies is limited to 60 percent. Securities
underwriting companies not established under Philippine law are not allowed to un-
derwrite securities for the Philippine market, but may underwrite Philippine issues
for foreign markets.
Insurance: Minimum capitalization requirements increase with the degree of for-
eign equity. Current regulations specify that only the Philippines’ Government Serv-
ice Insurance System can provide coverage for government-funded and Build-Oper-
ate-Transfer (BOT) projects. Insurance and professional reinsurance companies op-
erating in the country are required by law to cede to the industry-owned National
Reinsurance Corporation of the Philippines at least 10 percent of outward reinsur-
ance placements.
Professional Services: The Philippine Constitution reserves the practice of licensed
professions to Philippine citizens. This includes, inter alia, law, engineering, medi-
cine, accountancy, architecture, and customs brokerage.
Telecommunications: The Philippine Constitution limits foreign ownership in pub-
lic utilities to 40 percent. Telecommunication firms are considered public utilities.
Shipping: Foreign-flagged vessels are prohibited from the carriage of domestic
trade.
Express Delivery Services: Foreign air express couriers and airfreight forwarding
firms must either contract with a wholly Philippine-owned business to provide deliv-
ery services, or establish a domestic company, at least 60 percent of which should
be Philippine-owned.
Standards, Testing, Labeling, and Certification: Imports of products covered by
mandatory Philippine national standards must be cleared by the Bureau of Product
Standards (BPS). Labeling requirements apply to a variety of products, including
pharmaceuticals, food, textiles and certain industrial goods. The Generics Act of
1988 mandates that the generic name of a particular pharmaceutical product appear
above its brand name on all packaging.
Investment Barriers: The Foreign Investment Act of 1991 contains two ‘‘negative
lists’’ that outline areas where foreign investment is restricted. ‘‘List A’’ restricts for-
eign investment in certain sectors because of constitutional or legal constraints. No
foreign investment is permitted in, among others, mass media (including cable tele-
vision), small-scale mining, private security agencies, and the manufacture of fire-
crackers and pyrotechnic devices. Varying foreign ownership limitations also apply
to, among others, recruitment agencies (25 percent), public works construction and
repair (25 percent, with the exception of BOT and foreign-assisted projects), adver-
tising (30 percent), public utilities (40 percent), education (40 percent), commercial
deep-sea fishing (40 percent), the exploration and development of natural resources
(40 percent, except for high-cost and high-risk activities such as oil exploration and
large-scale mining), financing (60 percent), and securities underwriting (60 percent).
Land ownership is reserved to Philippine citizens and corporations that are at least
60 percent owned by Philippine citizens. The Retail Trade Liberalization Act of 2000
(signed in March 2000) repealed 1954 legislation banning foreigners from retail
trade, but prohibits foreign participation in retail companies capitalized at less than
$2.5 million. A lower minimum capitalization threshold ($250,000) applies to foreign
retail establishments specializing in high-end luxury products. Retail trade firms
not specializing in high-end luxury items which are more than 80 percent foreign-
owned should offer at least 30 percent of their equity to the public within eight
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years from start of operations. ‘‘List B’’ limits foreign ownership (generally to 40 per-
cent) for reasons of public health, safety and morals. This list also seeks to protect
local small- and medium-sized firms by restricting foreign ownership to no more
than 40 percent in non-export firms capitalized at less than $200,000.
Incentives and Export Performance Requirements: In general, foreign-owned firms
producing for the domestic market must engage in a ‘‘pioneer’’ activity to qualify for
incentives administered by the government’s Board of Investment (BOI). For export-
ers, the BOI imposes a higher export performance requirement for foreign-owned en-
terprises (70 percent of production should be exported) than for Philippine-controlled
companies (50 percent). With the exception of foreign-controlled firms that export
100 percent of production, foreign firms that seek incentives from the Board of In-
vestments must commit to divest to 40 percent ownership within 30 years or such
longer period as the BOI may allow. The Philippines has requested an extension of
the January 1, 2000 deadline to eliminate WTO-inconsistent local-content and for-
eign exchange requirements under its motor vehicle development program. The U.S.
counterproposal requires that the Philippines agree to an expedited procedure in the
event of any dispute concerning the Philippine’s obligations to eliminate the Trade-
Related Investment Measures (TRIMs) by June 30, 2002.
Local Sourcing Requirements: Outside of the investment incentives regime, inves-
tors in certain industries are subject to specific laws which require local sourcing.
E.O. 776 requires that pharmaceutical firms purchase semi-synthetic antibiotics
from a specific local company, unless they can demonstrate that the landed cost of
imported semi-synthetic antibiotics is at least 20 percent less than that produced
by the local firm. E.O. 259 bans imports of soap and detergents containing less than
60 percent coconut-based surface active agents of Philippine origin, thereby requir-
ing local sourcing by soap and detergent manufacturers. Letter of Instruction (LOI)
1387, issued in 1984, requires mining firms to prioritize the sale of their copper con-
centrates to Philippine Associated Smelting and Refining Corp. (PASAR), a govern-
ment-controlled firm until its privatization in 1998. The Retail Trade Liberalization
Act of 2000 requires local sourcing for the first ten years after the law’s effective
date. During that period, 10 percent of the cost of inventory of foreign retail firms
specializing in high-end luxury merchandise, and at least 30 percent of the inven-
tory cost of other retail establishments, should consist of Philippine-made products.
Government Procurement Practices: Contracts for government procurement are
awarded by competitive bidding. Preferential treatment of local suppliers is prac-
ticed in government purchases of pharmaceuticals, rice, corn, and iron/steel mate-
rials for use in government projects, and in locally-funded government consulting re-
quirements. The Philippines is not a signatory of the WTO Government Procure-
ment Agreement.
Customs Procedures: On March 31, 2000 the Philippine government ended its con-
tract with a private firm, Societe Generale de Surveillance, to perform preshipment
inspection services. Thus, effective April 1, there is no longer any physical
preshipment inspection requirement for exporters. Instead, all importers or their
agents are required to file import entries directly with the Philippine Bureau of
Customs (BOC), which processes these entries through its Automated Customs Op-
erating System (ACOS). ACOS uses a computer system to classify shipments as low-
risk (green lane), moderate risk (yellow lane) or high risk (red lane). The govern-
ment implements the ‘‘transaction value’’ method of customs valuation, in line with
WTO obligations.
6. Export Subsidies Policies
Firms engaged in activities under the government’s ‘‘Investment Priorities Plan’’
may register with the Board of Investments (BOI) for fiscal incentives, including
three to six year income tax holidays and a tax deduction equivalent to 50 percent
of the wages of direct-hire workers for the first five years from registration. BOI-
registered firms that locate in less-developed areas may be eligible to claim a tax
deduction of up to 100 percent of outlays for infrastructure works and 100 percent
of incremental labor expenses also for the first five years from registration. Export-
oriented firms located in government-designated export zones and industrial estates
registered with the Philippine Economic Zone Authority enjoy basically the same in-
centives as BOI-registered firms, and a longer income tax holiday (ITH) of four
years, extendable to a maximum of eight years. After the ITH period, a special five
percent tax on gross income in lieu of all national and local taxes will apply. Firms
which earn at least 50 percent of their revenues from exports may register for cer-
tain tax credits under the ‘‘Export Development Act’’ (EDA), including a tax credit
based on incremental export revenues.
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7. Protection of U.S. Intellectual Property
The Philippines is a party to the Bern and Paris Conventions, the WTO Agree-
ment on Trade Related Aspects of Intellectual Property (TRIPS), and is a member
of the World Intellectual Property Organization. The Philippines remains on the
‘‘Special 301’’ Watch List.
While substantial progress has been made in recent years, significant problems
remain in ensuring consistent, effective protection of intellectual property rights
(IPR). The IP law (R.A. 8293), which took effect January 1, 1998, improves the legal
framework for IPR protection. It enhanced copyright and trademark protection; cre-
ated a new Intellectual Property Office with original jurisdiction to resolve IPR in-
fringement complaints; increased penalties for infringement and counterfeiting; and
relaxed provisions requiring the registration of licensing agreements. The law, how-
ever, contains significant deficiencies. These include the lack of authority for courts
to order the seizure of pirated material as a provisional measure without notice to
the infringer; ambiguous provisions on the rights of copyright owners over broad-
cast, rebroadcast, cable retransmission, or satellite retransmission of their works;
and burdensome requirements concerning licensing contracts. Additional legislation
is pending to provide IPR protection for plant varieties and layout-designs of inte-
grated circuits, in line with WTO obligations. A new challenge for IPR has arisen
in the pharmaceutical industry; the Philippine government is developing plans to
purchase and parallel import pharmaceuticals in an effort to reduce medical costs.
Such plans may involve off-patent but branded medicines. U.S. and other pharma-
ceutical manufacturers have threatened legal action if the plan is WTO-inconsistent
or threatens their commercial interests.
Enforcement: Enforcement agencies generally will not proactively target infringe-
ment unless the copyright owner brings it to their attention and works with them
on surveillance and enforcement actions. Joint efforts between the private sector
and the National Bureau of Investigation and Philippine Customs have resulted in
successful enforcement actions. While certain courts have been designated to hear
IPR cases, little has been done to streamline judicial proceedings in this area, as
these courts have not received additional resources and continue to handle a heavy
non-IPR workload. In addition, IPR cases are not considered ‘‘major crimes,’’ and
take a lower precedence in court proceedings. Because of the prospect that court ac-
tion will be lengthy, many cases are settled out of court.
Patents: R.A. 8293 mandates a first-to-file system, increases the term of patents
from 17 to 20 years from date of filing, provides for the patentability of micro-orga-
nisms and non-biological and microbiological processes, and gives patent holders the
right of exclusive importation of their inventions.
Trademarks, Service Marks and Trade Names: R.A. 8293 no longer requires prior
use of trademarks in the Philippines as a requirement for filing a trademark appli-
cation. Also eliminated was the requirement that well-known marks be in actual use
in Philippine commerce or registered with the government. Trademark infringement
remains a serious problem in the Philippines.
Copyrights: R.A. 8293 expands IPR protection by clarifying protection of computer
software as a literary work (although it includes a fair-use provision on
decompilation of software), establishing exclusive rental rights, and providing terms
of protection for sound recordings, audiovisual works, and newspapers and periodi-
cals that are compatible with the WTO TRIPS Agreement. Software, music and film
piracy remain widespread. The Business Software Alliance estimates that 78 per-
cent of business software in use in 1998 was unlicensed; the piracy rate for enter-
tainment software is 90 percent. The Motion Picture Association of America esti-
mates that two-thirds of motion pictures on video or optical discs in 1998 were ille-
gal copies. The illegal retransmission of satellite programming by cable operators is
a growing problem.
The U.S. intellectual property industry estimates 1999 potential trade losses due
to piracy of software at $50.5 million; of motion pictures, $18 million; of sound re-
cordings, $2 million; of books, $44 million.
8. Worker Rights
a. The Right of Association: All workers (including public employees) have the
right to form and join labor unions. Although this right is exercised in practice, as-
pects of the public sector organization law restrict and discourage organizing. Trade
unions are independent of the government and generally free of political party con-
trol. Unions have the right to form or join federations or other labor groups. Subject
to certain procedural restrictions, strikes in the private sector are legal. Unions are
required to provide strike notice, respect mandatory cooling-off periods, and obtain
majority member approval before calling a strike.
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b. The Right to Organize and Bargain Collectively: The Philippine Constitution
guarantees the right to organize and bargain collectively. The Labor Code protects
and promotes this right for employees in the private sector and in government-
owned or controlled corporations. A similar but more limited right is afforded to em-
ployees in most areas of government service. Dismissal of a union official or worker
trying to organize a union is considered an unfair labor practice. Labor law is uni-
form throughout the country, including industrial zones. However, local political
leaders and officials governing some special economic zones have tried to frustrate
union organizing efforts by maintaining ‘‘union free/strike free’’ policies. In the gar-
ment industry, the widespread use of short-term, contract workers is an obstacle to
workers forming unions or obtaining medical and retirement benefits.
c. Prohibition of Forced or Compulsory Labor: The Philippine Constitution pro-
hibits forced labor, and the government generally enforces this prohibition.
d. Minimum Age for Employment of Children: Philippine law prohibits the em-
ployment of children below age 15, with some exceptions involving situations under
the direct and sole responsibility of parents or guardians, or in the cinema, theater,
radio and television in cases where a child’s employment is essential. The Labor
Code allows employment for those between the ages of 15 and 18 for such hours
and periods of the day as are determined by the Secretary of Labor, but forbids em-
ployment of persons under 18 years in hazardous or dangerous work. Government
and international organization estimates indicate that some three million children
under age 18 are employed in the informal sector of the urban economy, certain
fishing practices, port work or as unpaid family workers in rural areas.
e. Acceptable Conditions of Work: A comprehensive set of occupational safety and
health standards exists in law. Statistics on actual work-related accidents and ill-
nesses are incomplete, as incidents (especially in regard to agriculture) are under-
reported.
f. Rights in Sectors with U.S. Investment: U.S. investors in the Philippines gen-
erally apply U.S. standards of worker safety and health, in order to meet the re-
quirements of their home-based insurance carriers. Some U.S. firms have resisted
efforts by their employees to form unions, with local government support.
Extent of U.S. Investment in Selected Industries—U.S. Direct Investment Position Abroad on an
Historical Cost Basis—1999
[Millions of U.S. Dollars]
Category Amount
Petroleum .......................................................................... 601
Total Manufacturing ......................................................... 1,270
Food and Kindred Products .......................................... 351
Chemicals and Allied Products .................................... 419
Primary and Fabricated Metals ................................... 41
Industrial Machinery and Equipment ......................... 19
Electric and Electronic Equipment .............................. 258
Transportation Equipment ........................................... 0
Other Manufacturing .................................................... 181
Wholesale Trade ............................................................... 184
Banking ............................................................................. 283
Finance/Insurance/Real Estate ........................................ 1,028
Services .............................................................................. 223
Other Industries ............................................................... 203
TOTAL ALL INDUSTRIES ............................................. 3,792
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
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SINGAPORE
Key Economic Indicators
[Millions of U.S. Dollars unless otherwise indicated]
1998 1999 2000 1
Income, Production and Employment:
Nominal GDP 2 .............................................. 82,951 85,196 104,426
Real GDP Growth (pct) 2 ............................... 0.4 5.4 9.0
GDP by Sector: 2
Agriculture 3 ............................................... 0 0 0
Manufacturing ........................................... 19,133.5 22,049.7 27,150.8
Services ....................................................... 55,334.7 57,355.0 69,965.6
Government expenditure ........................... 8292.2 8264.4 10,129.3
Per Capita GDP (US$) .................................. 26,221.4 26,478.9 32,001.2
Labor Force (000s) ......................................... 1,931.8 1,976.0 2,035.3
Unemployment Rate (pct) ............................. 3.2 3.5 3.5
Money and Prices (annual percentage
growth):
Money Supply Growth (M2) ......................... 30.2 8.5 2.9
Consumer Price Inflation (pct) ..................... –0.3 0.4 2.0
Exchange Rate (SGD/US$ annual average) 1.67 1.69 1.72
Balance of Payments and Trade:
Total Exports FOB ........................................ 110,037.7 114,964.5 139,617.7
Exports to United States CIF 4 ................. 21,859.7 22,020.6 23,064.5
Total Imports CIF ......................................... 101,714.7 111,326.4 134,980.7
Imports from United States FAS 4 ........... 18,714.4 18,960.9 19,636.3
Trade Balance ................................................ 8,323.1 3,638.1 4,637.0
Trade Balance with United States 4 ......... 3,154.3 3,059.6 3,428.3
External Public Debt .................................... 0 0 0
Fiscal Surplus/GDP (pct) .............................. 0.7 1.9 1.5
Current Account Surplus/GDP (pct) ............ 25.4 25.0 25.0
Debt Service Payments/GDP (pct) ............... 0 0 0
Gold and Foreign Exchange Reserves ......... 73,994.2 75,243.2 77,183.8
Aid from United States ................................. 0 0 0
Aid from Other Sources ................................ 0 0 0
Note: All percentage changes are calculated based on the local currency.
1 2000 figures are projections based on most recent data available.
2 Singapore introduced a methodology to include offshore stockbroking, investment advisory and insurance
services in the output of the financial services industry, resulting in changes to the GDP and growth figures
computed in previous years. GDP data has also been re-grouped into eleven industries from the eight pre-
viously.
3 Includes the agriculture, fishing and quarrying industries.
4 Trade data was taken from the U.S. Department of Commerce instead of Singaporean government
sources.
1. General Policy Framework
Singapore’s open-trade economic policies have enabled it to overcome land, labor
and resource constraints to become the world’s second most competitive economy
(according to the World Economic Forum’s 2000 ranking). It has also helped Singa-
pore achieve the world’s fifth highest per capita income, based on the World Bank’s
1999/2000 ranking of per capita GNP in purchasing power parity terms. Singapore
is a founding member of the World Trade Organization (WTO), the Asia Pacific Eco-
nomic Cooperation (APEC) Forum, and the Association of Southeast Asian Nations
(ASEAN).
Internally, while Singapore has a largely free-market business environment, gov-
ernment-linked companies (GLCs) account for some 60 percent of GDP. The GLCs
generally operate as commercial entities and frequently include private local and
foreign equity. Many are publicly listed.
Manufacturing, dominated by electronics, chemicals (including oil refining) and in-
formation technology-related products, accounted for 24 percent of total GDP in
1999. Multinational companies accounted for 75 percent of new manufacturing in-
vestment, which totaled US$4.7 billion in 1999. Wholesale and retail trade rep-
resented 14 percent of GDP in 1999, reflecting Singapore’s key role as a regional
gateway. Financial services, which accounted for 13 percent of GDP in 1999, is the
third largest economic sector. Trade was 2.7 times GDP in 1999; re-exports (trans-
shipments) accounted for 36 percent of total merchandise exports.
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The government pursues conservative fiscal policies designed to encourage high
levels of savings and investment, but invests heavily in the country’s social and
physical infrastructure, including education and transportation. It also provides sub-
sidies for public housing. The government generally runs a budget surplus (US$1.7
billion in Singapore Fiscal Year [SFY] 1999). The Central Provident Fund (CPF), a
compulsory savings program that requires 22 percent of an individual’s salary to be
placed in a tax-exempt account, is the principal reason for the high gross national
savings rate of over 60 percent of GDP.
There are virtually no controls on capital movements. The key objective of the
Monetary Authority of Singapore (MAS), the country’s central bank, is to maintain
price stability. It does so largely through exchange rate policy. MAS also engages
in limited money-market operations to influence interest rates and ensure adequate
liquidity in the banking system. Inflation has averaged two percent, annually, over
the last 10 years, except for 1998 when there was deflation of 0.3 percent due to
the economic recession. Since the economic recovery, price levels have been rising
with the CPI expected to increase by two percent in 2000. The average prime lend-
ing rate among the leading banks is currently at 5.9 percent, after peaking at about
7.8 percent in mid-1998.
The United States is Singapore’s largest trading partner, accounting for 16 per-
cent of Singapore’s total trade in 1999. U.S. exports to Singapore amounted to
US$16.2 billion in 1999, while Singapore’s exports to the United States totaled
US$18.2 billion. Singapore was the tenth largest export market for the United
States in 1999. Over 1,300 U.S. companies have facilities in Singapore, with total
investments of US$24.8 billion in 1999. In December 2000, Singapore began negotia-
tions for a bilateral free trade agreement with the United States.
2. Exchange Rate Policy
Singapore has no exchange rate controls and exchange rates are determined freely
by market forces. At the same time, the MAS uses currency swaps and direct open
market operations to keep the Singapore dollar within an undisclosed desired range
relative to an undisclosed basket of currencies of the country’s major trading part-
ners. The government imposes certain restrictions to limit the internationalization
of the Singapore dollar. It opened up the Singapore dollar debt market to foreign
companies and financial institutions, on condition that the funds are converted to
foreign exchange prior to use abroad.
The Singapore dollar depreciated by as much as 20 percent against the U.S. dollar
between July 1997 and August 1998, but appreciated vis-a-vis major regional cur-
rencies and maintained its trade-weighted exchange rate. Since then, the Singapore
currency has recovered slightly against the U.S. dollar, in tandem with the economic
rebound, and is forecast to post an average exchange rate for 2000 of about SGD
1.71 to SGD 1.72 per U.S. dollar.
3. Structural Policies
Market forces generally determine product prices. The government conducts its
bids by open tender and encourages price competition throughout the economy.
Singapore’s personal income tax rates range from 2 percent for the lowest income
bracket to 28 percent for those earning annual incomes exceeding SGD 400,000
(about US$240,000). The government lowered the corporate income tax rate from 26
percent to 25.5 percent this year. Foreign firms are taxed at the same rate as local
firms. There is no tax on capital gains except on residential properties that are sold
within three years. The government implemented a three percent value-added
Goods and Services Tax (GST) in 1994.
Investment policies are open, transparent, and tailored to attract foreign invest-
ment and ensure an environment conducive to efficient business operations. Al-
though the government vigorously develops and implements industrial policies, it
does not impose production standards, require purchases from local sources, or
specify a percentage of output for export. To catalyze Singapore’s advancement into
a knowledge-based economy and an international financial center, the government
is working to attract foreign professionals to live and work in Singapore.
4. Debt Management Policies
Singapore has no external public debt. The country’s total foreign reserves
amounted to US$77.2 billion as of end-1999, sufficient to cover 8.2 months of im-
ports. Singapore does not receive financial assistance from foreign governments.
5. Significant Barriers to U.S. Exports
Approximately 96 percent of imports are duty-free. Tariffs are primarily levied on
cigarettes and alcohol to restrict their consumption. Excise taxes are levied on petro-
leum products and motor vehicles to restrict motor vehicle use. Import licenses are
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not required; customs procedures are minimal and designed to facilitate trade; and
the standards code is reasonable. All major government procurements are by inter-
national tender. Singapore is a signatory to the WTO Government Procurement
Agreement.
While welcoming foreign investment in most areas, important barriers to U.S.
service providers have existed in some sectors, particularly in finance, telecommuni-
cations, legal services and power generation and distribution. However, the govern-
ment has embarked on a major liberalization effort to reduce or remove these bar-
riers.
As part of its strategy to become an international financial center, the Monetary
Authority of Singapore (MAS) has liberalized domestic restrictions on foreign finan-
cial services providers. In May 1999 MAS removed the 40 percent ceiling on foreign
ownership of local banks, and in late 1999 it opened up the local securities market
to foreign brokers. In October 1999 MAS issued a ‘‘qualifying full bank’’ (QFB) li-
cense to four new foreign banks, allowing each of them to establish up to ten retail
locations (branches or ATMs). MAS also issued eight additional restricted bank li-
censes. These measures expand the capability of foreign banks to engage in local
retail banking; foreign banks currently hold 23 of the 35 full (local retail) banking
licenses. However, foreign banks cannot use Automated Teller Machines (ATM) be-
yond those located at their premises and ATM networks remain restricted to local
banks. Customers of foreign banks are thus unable to access their accounts except
through ATMs owned by their bank, a significant barrier given government efforts
to encourage electronic payments and use of ‘‘smart’’ cards.
The telecommunications sector was opened to full competition on April 1, 2000,
two years ahead of schedule. Restrictions on the provision of value-added network
services have been lifted, although the government bans the importation of satellite
receivers. The government is in the process of opening the power generation and
supply sectors to competition. The electricity and gas distribution network will be-
come a regulated monopoly operated by a corporatized-government entity.
The government has moved tentatively to open the legal services market. In Au-
gust 2000 the government approved licenses for seven foreign law firms to form
joint ventures with local firms to offer legal services relating to international and
cross-border financial, banking, Internet and corporate cases. However, foreign law-
yers are still not allowed to represent their clients in local courts, undertake litiga-
tion and conveyancing work, or to engage in other fields of law.
In May 2000 the government passed legislation easing the ban on direct selling
and multi-level marketing arrangements. The Ministry of Trade and Industry has
issued guidelines for the type of arrangements that will be permitted. However, the
legislation makes any recruitment-connected revenue illegal, and officials have
stressed that earnings must come from the sale of goods, not recruitment.
6. Export Subsidies Policies
Singapore does not directly subsidize exports. The government offers significant
incentives to attract foreign investment, with most incentives directed at export-ori-
ented industries. It also offers tax incentives to exporters and reimburses firms for
certain costs incurred in trade promotion. It does not employ multiple exchange
rates, preferential financing schemes, import cost-reduction measures or other
trade-distorting policy tools.
7. Protection of U.S. Intellectual Property
Singapore has been on the USTR’s Special 301 Watch List since 1997, due to in-
adequate protection of intellectual property (IP) rights. Overall piracy levels, while
among the lowest in Asia, remain double those in the United States. A primary
problem has been retail piracy of computer software, music, and films. Singapore
is a signatory to the Bern Convention, the Paris Convention, the Patent Co-oper-
ation Treaty, and the Budapest Treaty. Singapore is also a party to the WTO Agree-
ment on Trade-Related Intellectual Property Rights (TRIPS). Singapore has not ac-
ceded to the WIPO Copyright Treaty and the WIPO Performances and Phonograms
Treaty, although aspects of the treaties have been incorporated into local law.
Singapore has enacted a series of laws and amendments to existing provisions in-
tended to bring the country into compliance with its TRIPS obligations. These meas-
ures included numerous amendments to its Copyright Law (1998 and 1999) and the
Medicines Act (1998), as well as a new Trade Marks Act (1998), Geographical Indi-
cations Act and Layout Designs of Integrated Circuits Act (1999), and Registered
Designs Act (2000). Singapore government officials state that the country’s legal
framework intellectual property (IP) rights now goes beyond the country’s TRIPS ob-
ligations.
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In addition to crafting new laws, the government has taken more aggressive and
sustained action to improve IP enforcement. Licensing requirements for optical disc
(OD) manufacturing and import controls on OD manufacturing equipment came into
force in late 1998 and are generally believed to have effectively eliminated the pro-
duction of pirated optical discs in Singapore. A new IP unit in the Singapore Police
Criminal Investigation Division has made progress in targeting retail pirates and
criminal syndicates. According to government officials, there were over 2,000 raids
against retail pirates in 1999. Since mid-July 2000, the most notorious shopping
center for retail piracy has been free of pirated works, as a result of sustained en-
forcement action, and the police have raided several night markets selling pirated
goods. Finally, the government has intensified a long-term campaign aimed at edu-
cating primary and secondary students as well as the general public on the IP issue.
In October 1999 a number of U.S. publishers, in cooperation with European and
local publishers, formed the Copyright Licensing and Administration Society of
Singapore (CLASS) to utilize a provision of the Copyright Act to compel local univer-
sities and other educational institutions to pay royalty fees in exchange for the right
to duplicate copyrighted printed works for use in course materials.
However, problems remain. The government has appeared unwilling to discard
the ‘‘self-help’’ approach that forces industry groups to conduct raids on their own,
even though the new police unit represents an important step away from this ap-
proach. Significant remaining problems include retail piracy at itinerant street mar-
kets, end-use piracy of computer software, widespread piracy of computer entertain-
ment software, and the unauthorized copying of books. The lack of criminal pen-
alties for end-use piracy of software hampers effective enforcement. Copyright in-
dustry groups contend that August 1999 amendments extending copyright protec-
tion to the Internet and certain digital works contain gaps and omissions which
present a serious problem for copyright protection. Actions to improve responsive-
ness to information sharing requests from U.S. enforcement agencies would also fa-
cilitate efforts to address effectively transnational IP crimes.
According to the International Intellectual Property Alliance (IIPA), total losses
from local IP piracy were estimated at about US$115 million in 1999, down from
US$139 million in 1998. For business application software, IIPA estimated 1999
losses at nearly US$50 million with a 51 percent level of piracy, down from 1998.
For computer entertainment software, it estimated US$52 million in losses and a
65 percent piracy rate in 1999, also down from 1998. IIPA calculated that the mo-
tion picture industry lost US$8 million due to a 25 percent piracy level in 1999,
level with losses in 1998. The music industry was reported to have suffered losses
of US$2 million and a 20 percent piracy rate in 1999. The American Association of
Publishers estimated that publishers lost US$2 million to piracy of printed works
in 1999.
8. Worker Rights
a. The Right of Association: The Singapore Constitution gives all citizens the right
to form associations, including trade unions. Parliament may, however, impose re-
strictions due to security, public order, or morality considerations. The right of asso-
ciation is delimited by the Societies Act, and labor and education laws and regula-
tions.
Singapore’s labor force numbered two million in 1999, of which 290,000 or about
15 percent were organized into 76 trade unions. Sixty-nine of these unions are affili-
ated with an umbrella organization, the National Trades Union Congress (NTUC),
which has a symbiotic relationship with the government.
b. The Right to Organize and Bargain Collectively: Collective bargaining is a nor-
mal part of labor-management relations in Singapore, particularly in the manufac-
turing sector. Collective bargaining agreements are renewed every two to three
years, although wage increases are negotiated annually.
c. Prohibition of Forced or Compulsory Labor: Singapore law prohibits forced or
compulsory labor. Under sections of the Destitute Persons Act, however, any indi-
gent person may be required to reside in a welfare home and engage in suitable
work.
d. Minimum Age for Employment of Children: The government enforces the Em-
ployment Act, which prohibits the employment of children under 12 years of age and
restricts children under 17 from certain categories of work.
e. Acceptable Conditions of Work: The Singapore labor market offers relatively
high wage rates and working conditions consistent with international standards.
However, Singapore has no minimum wage or unemployment benefits. The govern-
ment’s enforcement of comprehensive occupational safety and health laws, coupled
with the promotion of educational and training programs, have reduced the fre-
quency and severity of industrial accidents during the last decade.
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f. Rights in Sectors with U.S. Investment: U.S. firms have substantial investments
in several industries, notably petroleum, chemicals and related products, electronic
and electronics equipment, transportation equipment, and other manufacturing
areas. Labor conditions in these sectors are the same as in other sectors of the econ-
omy.
Extent of U.S. Investment in Selected Industries—U.S. Direct Investment Position Abroad on an
Historical Cost Basis—1999
[Millions of U.S. Dollars]
Category Amount
Petroleum .......................................................................... 2,815
Total Manufacturing ......................................................... 11,367
Food and Kindred Products .......................................... –4
Chemicals and Allied Products .................................... 628
Primary and Fabricated Metals ................................... 23
Industrial Machinery and Equipment ......................... 5,280
Electric and Electronic Equipment .............................. 4,637
Transportation Equipment ........................................... 230
Other Manufacturing .................................................... 573
Wholesale Trade ............................................................... 1,354
Banking ............................................................................. 532
Finance/Insurance/Real Estate ........................................ 8,103
Services .............................................................................. 519
Other Industries ............................................................... 91
TOTAL ALL INDUSTRIES ............................................. 24,781
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
TAIWAN
Key Economic Indicators
[Billions of U.S. Dollars unless otherwise indicated]
1998 1999 2000 1
Income, Production and Employment:
GDP (at current prices) ............................................ 267.2 287.8 316.8
Real GDP Growth (percent) ..................................... 4.6 5.4 6.6
GDP by Sector:
Agriculture ............................................................. 6.6 7.4 6.6
Manufacturing ....................................................... 73.2 76.5 83.0
Services ................................................................... 168.2 184.9 207.5
Government ............................................................ 26.8 29.3 32.2
Per Capita GDP (US$) .............................................. 12,268 13,114 14,326
Labor Force (000s) ..................................................... 9,668 9,668 9,790
Unemployment Rate (percent) ................................. 2.7 2.9 2.9
Money and Prices (annual percentage growth):
Money Supply (M2) ................................................... 8.8 8.3 7.0
Consumer Price Inflation .......................................... 1.7 0.2 1.6
Exchange Rate (NT$/US$) 2
Official .................................................................... 33.41 32.23 30.88
Balance of Payments and Trade: 3
Total Exports FOB 4 .................................................. 110.6 121.6 151.0
Exports to United States CV 5 .............................. 33.1 35.2 39.8
Total Imports CIF 4 ................................................... 110.7 110.7 144.8
Imports from United States FAS 5 ....................... 18.2 19.1 23.8
Trade Balance 4 ......................................................... 5.9 10.9 6.2
Trade Balance with United States 5 ..................... 14.9 16.1 16.0
External Public Debt ................................................. .05 0.03 0.02
Fiscal Deficit/GDP (pct) ............................................ 1.1 1.1 1.4
Current Account Surplus/GDP (pct) ........................ 1.3 2.0 0.7
Debt Service Payments/GDP (pct) ........................... 1.1 2.5 2.5
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Key Economic Indicators—Continued
[Billions of U.S. Dollars unless otherwise indicated]
1998 1999 2000 1
Gold and Foreign Exchange Reserves ..................... 95.1 111.1 130.0
Aid from United States 6 ........................................... 0 0 0
Aid from Other Countries ......................................... 0 0 0
1 2000 figures are estimated based on data from the Directorate General of Budget, Accounting and Statis-
tics (DGBAS), or extrapolated from data available as of June 2000.
2 An average of month-end exchange rate figures for each year.
3 Merchandise trade only. Taiwan service trade statistics are not broken out by country.
4 Taiwan Ministry of Finance (MOF) figures for merchandise trade.
5 Sources: U.S. Department of Commerce and U.S. Census Bureau; exports FAS, imports customs basis;
2000 figures are estimates based on data available through August. Taiwan MOF figures for merchandise ex-
ports (FOB) to and imports (CIF) from the United States were (US$ billions): (1998) 29.4/19.7, (1999) 30.9/
19.7, (2000) 35.8/27.2.
6 Aid disbursements stopped in 1965.
7 Figures in the table and the following text disagreeing with those in the previous reports are mainly due
to later revisions by DGBAS.
1. General Policy Framework
Over five decades, Taiwan has transformed from a developing to a comparatively
developed economy. During its transformation, Taiwan has maintained macro-eco-
nomic stability, though its real GDP growth slowed from well over nine percent in
the 1950s and 1960s to 6.5 percent in the 1990s. Economic growth declined to 4.6
percent in 1998 and 5.4 percent in 1999 when Taiwan experienced the aftershocks
of the 1997–98 Asian financial crisis and a destructive earthquake in the central
part of the island in September 1999. Prompted by an expansion of world trade, eco-
nomic growth in 2000 is expected to exceed 6.5 percent. Per capita GDP is currently
$14,300. As of August 2000, Taiwan held $113 billion in foreign exchange reserves,
the third largest in the world (after Japan and the PRC). Prices rose 0.2 percent
in 1999 and are expected to rise no more than two percent in 2000 despite a sharp
rise in international oil prices.
Industrial growth is now concentrated in capital and technology intensive indus-
tries such as petrochemicals, computers, semiconductors, and electronic components,
as well on consumer goods industries. Rising labor and land costs have long led
many manufacturers in labor intensive industries to move offshore, mainly to South-
east Asia and mainland China. Services accounted for 64 percent of GDP in 1999,
up one percentage point from 1998. Merchandise exports remained unchanged from
1998 at 42 percent of GDP in 1999.
An expansion of social welfare programs and earthquake reconstruction efforts
have broadened the central budget deficit and caused domestic public debt to in-
crease steadily. The central budget deficit is expected to grow from 1.1 percent of
GNP in 1998 and 1999 to 1.4 percent in 2000. During the period of 2000–02, out-
standing public debt is expected to increase from 27.7 percent of GNP to 28.3 per-
cent. Taiwan’s central authorities now rely largely on domestic bonds and bank
loans to finance the fiscal gap. Social welfare replaced national defense as the larg-
est share of public expenditures in 2000. The share for social welfare expenditure
increased from 11.4 percent in 1999 to 16.4 percent in 2000 and will further rise
to 18.8 percent in 2001. On the other hand, the share for defense spending dropped
from 20.1 percent in 1999 to 15.5 percent in 2000 and is expected to level off in
2001. The greatest pressure on the budget now comes from growing demands for
improved infrastructure and social welfare spending, including a national health in-
surance plan initiated in early 1995.
Taiwan is scheduled to accede to the World Trade Organization (WTO) in the near
future. As part of the accession process, Taiwan and the United States signed a
landmark bilateral WTO agreement in February 1998. The agreement includes both
immediate market access and phased-in commitments, and will provide substan-
tially increased access for U.S. goods, services, and agricultural exports to Taiwan.
Taiwan is also an active member of the Asia Pacific Economic Cooperation (APEC)
forum.
2. Exchange Rate Policies
Taiwan has a floating exchange rate system in which banks set rates independ-
ently. The Taiwan authorities, however, control the largest banks authorized to deal
in foreign exchange. The Central Bank of China (CBC) intervenes in the foreign ex-
change market when it feels that speculation or ‘‘drastic fluctuations’’ in the ex-
change rate may impair normal market adjustments. The CBC uses direct foreign
exchange trading by its surrogate banks and public policy statements as its main
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tools to influence exchange rates. The CBC still limits the use of derivative products
denominated in New Taiwan Dollars (NTD).
Trade-related funds flow freely into and out of Taiwan. Most restrictions on cap-
ital account flows have been removed since late 1995. Laws restricting repatriation
of principal and earnings from direct investment have been lifted. Despite signifi-
cant easing of previous restrictions on foreign portfolio investment, some limits re-
main in place.
3. Structural Policies
Twenty-one state-owned enterprises have been either totally or partially
privatized in the past six years, including nine in 1998 and six in 1999. Liberaliza-
tion has begun to break up state-owned enterprises’ monopoly in wireless and fixed
line telecommunications, power generation, and gasoline supply. Taiwan will phase
out the monopoly over wine and beer production after it accedes to WTO. State-
owned enterprises account for 8.3 percent of GDP, a proportion that shrinks annu-
ally. Taiwan’s Fair Trade Commission (FTC) acts to thwart noncompetitive pricing
by state-run monopolies. FTC exemptions granted in 1992 to several state-run mo-
nopolies were not renewed in 1997, making such firms subject to anti-monopoly
laws.
Taiwan has been lowering tariffs significantly in recent years, both as part of its
effort to accede to the WTO as well as to fulfill other policy objectives. Tariff reduc-
tions in July 1997 were designed to fulfill commitments made in the Information
Technology Agreement and the WTO Agreement on Trade in Civil Aircraft. Right
after the September 1999 earthquake, import duties for construction materials were
reduced to increase supply and stabilize domestic prices. In 1997 the import duty
for the foot-and-mouth disease (FMD) vaccine was cut by half in an effort to check
the spread of the disease. Many of the tariff cuts have been of specific interest to
U.S. industry. Taiwan’s current average nominal tariff rate is 8.2 percent; the im-
port-weighted rate is 2.5 percent, both down slightly over the past three years.
High tariffs and pricing structures on some goods, in particular on some agricul-
tural products, hamper U.S. exports. However, under the bilateral WTO agreement
reached in February 1998, Taiwan began to provide quotas for the import of pre-
viously banned pork, poultry, and variety meat products, and agreed to phase in tar-
iff cuts on numerous food products upon accession. The Taiwan Tobacco and Wine
Monopoly Bureau (TTWMB) has a monopoly on domestic production of cigarettes
and alcoholic beverages. As part of its bilateral WTO commitments to the United
States, however, Taiwan has pledged to convert an existing monopoly tax on these
products into primarily excise taxes and import tariffs, and also to open these mar-
kets after Taiwan accedes to WTO.
4. Debt Management Policies
Unofficial estimates put Taiwan’s outstanding long and short-term external debt
at $26 billion as of June 2000, equivalent to eight percent of GDP. Official figures
show that Taiwan’s long term outstanding external public debt totaled $31 million
as of March 2000, compared to gold and foreign exchange reserves of about $118
billion. Taiwan’s debt service payments in 1999 totaled $7.3 billion, only 5.4 percent
of exports of goods and services.
Foreign loans committed by Taiwan authorities exceed $5.9 billion. Taiwan offered
low-interest loans to the Philippines, Eastern Europe, Vietnam, South Africa, and
Latin America, mostly to build industrial zones and to foster development of small
and medium enterprises. Taiwan also contributes to the Asian Development Bank
(ADB), one of the two multilateral development banks in which it has membership.
Taiwan is a member of the Central American Bank for Economic Integration
(CABEI). The ADB, CABEI, the European Bank for Reconstruction and Develop-
ment (EBRD) and a number of other international organizations have all floated
bonds in Taiwan.
5. Significant Barriers to U.S. Exports
Accession to the WTO by Taiwan will open markets for many U.S. goods and serv-
ices. Of some 10,240 official import product categories, 1,024 are ‘‘regulated’’ and re-
quire approval from relevant authorities based on the qualifications of the importer,
the origin of the good, or other factors. Another 151 categories require import per-
mits from the Board of Foreign Trade or pro forma notarization by banks. Imports
of 251 categories are ‘‘restricted,’’ including ammunitions and some agricultural
products. These items can only be imported under special circumstances, and are
thus effectively banned. Eighty-six percent are completely exempt from any controls.
Financial: Taiwan continues to steadily liberalize its financial sector. Taiwan en-
acted a Futures Exchange Law in March 1997; a futures market was established
in July 1998. The Securities and Exchange Law was amended in May 1997 to re-
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move restrictions on employment of foreigners by securities firms, effective upon
Taiwan’s accession to the WTO. In early 1999 the limit on foreign ownership in list-
ed companies was raised from 30 percent to 50 percent. For qualified foreign institu-
tional investors, restrictions on capital flows have been removed, although they are
still subject to limits on portfolio investment. Foreign individual investors are sub-
ject to some limits on their portfolio investment and restrictions on their capital
flows.
Banking: In June 1997 the annual limit on a company’s nontrade outward (or in-
ward) remittances was raised from $20 million to $50 million. Inward/outward re-
mittances unrelated to trade by individuals are subject to an annual limit of $5 mil-
lion. There are no limits on trade-related remittances. NTD-related derivative con-
tracts may not exceed one-third of a bank’s foreign exchange position. To stabilize
the foreign exchange market in the wake of regional financial turmoil, the CBC
closed the non-deliverable forward (NDF) market to domestic corporations in May
1998; the NDF market remains open to foreign companies.
Legal: Foreign lawyers may not operate legal practices in Taiwan but may set up
consulting firms or work with local law firms. Qualified foreign attorneys may, as
consultants to Taiwan law firms, provide legal advice to their employers only. Legis-
lation was passed in May 1998 to permit the eventual establishment of foreign legal
partnerships either upon accession to the WTO, or upon implementation of the new
lawyer’s law, whichever comes first.
Insurance: In May 1997 the financial authorities announced that in principle in-
surance companies would be allowed to set some premium rates and policy clauses
without prior approval from regulators. Insurance companies are still required to re-
port such rates and clauses. In July 1995 Taiwan removed a prohibition against mu-
tual insurance companies; as of late 1999, however, authorities had not issued im-
plementing regulations.
Transportation: The United States and Taiwan have had an Open Skies Agree-
ment in effect since February of 1997. An amendment to the Highway Law allowing
branches of U.S. ocean and air freight carriers to truck containers and cargo in Tai-
wan went into effect on November 1, 1997. Taiwan also permitted foreign firms to
operate car leasing in November 1997.
Telecommunications: Taiwan’s private fixed-line telecommunication companies
will commence services in 2001. Taiwan’s authorities issued three new fixed line li-
censes to private consortia in March 2000. Taiwan liberalized the submarine cable
lease market in August 2000 and is expected to issue licenses two months after the
authorities receive applications. Restrictions on the operations of the license holders
continue to limit market openness, however, and are of major concern. Taiwan will
open the third generation (3 G) cellular phone market in early 2001. Under the bi-
lateral WTO agreement signed in February 1998, the state-owned Chunghwa
Telecom began to lower excessively high interconnection fees previously imposed on
private mobile service providers. This phased process is ongoing, but Chunghwa con-
tinues to engage in pricing practices which appear designed to unfairly subsidize its
mobile operations with its fixed line services, in which it continues to enjoy monop-
oly status. Taiwan regulators have begun to address such unfair trading practices.
In October 1998 Taiwan’s legislature passed a revised Telecom Law. It raised the
current 20 percent limit on foreign ownership of a telecom firm to 60 percent by
allowing a combination of direct and indirect ownership.
Pharmaceuticals and Medical Devices: Taiwan’s single payer socialized health
care system discriminates against imported drugs by setting prices for leading
brand-name products at artificially low levels, while providing artificially high reim-
bursement prices for locally-made generics. The process by which Taiwan registers
and prices new drugs is time-consuming, cumbersome and non-transparent. The re-
imbursement system also fails to account for significant quality differences between
different brands of medical devices. In June 2000 Taiwan adopted a new medical
device classification analogous to USFDA regulations (21 C.F.R.) to simplify reg-
istration procedures. However, Taiwan still subjects certain U.S. medical devices to
clinical trials above and beyond the steps required for them to be approved on the
U.S. or EU markets. This testing requirement, combined with annual quotas on the
introduction of new products, effectively constrains access of U.S. products to Tai-
wan’s market.
Movies and Cable TV: Taiwan eased import restrictions on foreign film prints
from 38 to 58 per title in late 1997. The number of theaters in any municipality
allowed to show the same foreign film simultaneously also increased from 11 to 18.
Effective August 1997, multi-screen theaters are allowed to show a film on up to
three screens simultaneously, up from the previous limit of one. Taiwan has pledged
to abolish these restrictions upon accession to the WTO. In the cable TV market,
concerns remain that the island’s two dominant Multi-System Operators (MSOs)
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collude to inhibit fair competition. Control by the two MSOs of upstream program
distribution, for example, has made it difficult for U.S. providers of popular chan-
nels to negotiate reasonable fees for their programs.
Standards, Testing, Labeling, and Certification: Taiwan has agreed to bring its
laws and practices into conformity with the WTO Agreement on Technical Barriers
to Trade as part of its WTO accession. However, Taiwan is not yet in conformity
with WTO norms. U.S. agricultural exports are often negatively affected because
prior notification of changes to standards, labeling requirements, etc, are not pro-
vided with adequate lead time; changes to standards and other import requirements
are not provided in a WTO language. In addition, concerns exist that U.S. fresh
produce and meat imports do not, in all cases, receive national treatment. Industrial
products such as air conditioning and refrigeration equipment, electric hand tools,
and synthetic rubber gloves must undergo redundant and unnecessary testing re-
quirements, which include destructive testing of samples. For some of these prod-
ucts, Taiwan has adopted and expanded an inspection and certification registration
system to eliminate duplicate inspection efforts. Imported autos face stringent noise,
emission and fuel efficiency testing requirements. In March 1999 the United States
and Taiwan signed a mutual recognition agreement (MRA) designed to eliminate
duplicate testing of information technology equipment. Certain Taiwan exports to
the United States previously tested for electromagnetic conformity in labs recog-
nized by Taiwan authorities will no longer require duplicate inspections in a U.S.
lab. Reciprocal treatment will likewise be accorded similar U.S. products imported
into Taiwan. Relevant U.S. agencies and their Taiwan counterparts are jointly im-
plementing operating procedures according to the principles of the MRA, including
nominating certified labs for mutual accreditation.
Investment Barriers: Taiwan continues to relax investment restrictions in a host
of areas, but foreign investment remains prohibited in some industries such as agri-
culture, fixed line telecommunications, broadcasting, and liquor and cigarette pro-
duction. Fixed line telecommunications will be completely liberalized by July 2001
under Taiwan’s WTO commitments. Liquor and cigarette production will be fully
liberalized by 2004.
Limits on foreign equity participation in a number of industries have been pro-
gressively relaxed in recent years. For example, permissible participation in ship-
ping companies was raised from 50 to 100 percent. A 33 percent limit on holdings
in air cargo forwarders and air cargo ground handling was raised to 50 percent in
1998, but remains unchanged for airlines. An amendment to the Civil Aviation Law
that would raise the holding limit to 100 percent on air cargo forwarders is now
pending legislative approval. In August 1997 Taiwan raised the cap on foreign in-
vestment in independent power projects from 30 percent to 49 percent. Local content
requirements in the automobile and motorcycle industries will be lifted as part of
Taiwan’s WTO accession. Restrictions on employment of foreign administrative per-
sonnel in foreign-invested firms remain in place.
Procurement Practices: Taiwan has committed to adhere to the WTO Agreement
on Government Procurement as part of its WTO accession. To prepare for this com-
mitment, a new Government Procurement Law (GPL) became effective in mid-1999,
potentially marking an important first step towards open, fair competition in Tai-
wan’s multi-billion dollar market for public procurement projects. However, in prac-
tice, foreign bidders still face one-sided terms and conditions, including inefficient
allocations of risks to the supplier and the lack of a binding arbitration mechanism.
These practices are discouraging foreign bidders from taking part in the market.
Customs Procedures: Taiwan has amended laws and regulations to implement the
customs-procedure-related WTO agreements, including the Agreement on Customs
Valuation, Agreement on Rules of Origin, Agreement on Anti-dumping, Agreement
on Subsidies and Countervailing Measures, and Agreement on TRIPS. The customs
procedures have, therefore, been streamlined. At times, however, the customs serv-
ice still adopts a reference price that is higher than the import cost reported by im-
porters.
6. Export Subsidies Policies
Taiwan provides an array of direct and indirect subsidy programs to farmers,
ranging from financial assistance to guaranteed purchase prices higher than world
prices. It also provides incentives to industrial firms in export processing zones and
to firms in designated ‘‘emerging industries.’’ Some of these programs may have the
effect of subsidizing exports. Taiwan is reducing or eventually eliminating such sub-
sidies as part of its commitments to WTO accession.
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7. Protection of U.S. Intellectual Property
Taiwan is not a party to any major multilateral IPR convention. In line with WTO
accession efforts, Taiwan has passed laws to protect integrated circuit layouts, per-
sonal data, and trade secrets. Taiwan currently protects copyrights dating from
1965. Revised Copyright, Patent, and Trademark Laws were passed in 1997. How-
ever, only the Trademark Law and certain provisions of the Copyright Law have
been implemented. The new Copyright Law, which will be fully implemented only
upon WTO accession, will extend retroactive copyright protection to 50 years. Tai-
wan implemented these changes to bring its IPR legal structure into conformity
with the WTO TRIPS agreement.
In 1999 Taiwan took steps to address U.S. concerns that the island was the larg-
est source of counterfeit goods in the United States. The Intellectual Property Office
(IPO) cooperated with police to implement an island-wide K-plan to crack down on
counterfeiting. The Bureau of Standards, Metrology, and Inspection conducts un-
scheduled inspection on CD manufacturers at night. In July 2000 the IPO adopted
a mandatory chip-marking program for MASK–ROM. As a result, counterfeit goods
from Taiwan seized by the U.S. Customs Service in the first half of 2000 dropped
31 percent below the same period of 1999 to $2.7 million, and the seized goods from
Taiwan declined from 43 to 12 percent of total U.S. seizures in the period. However,
concerns remain over significant amounts of pirate optical media products and coun-
terfeit semiconductor chip production. We look to Taiwan to confiscate CD products
without SID codes, to expand the chip-marking program to include micro-processors,
and to implement an effective semiconductor chip marking plan to aggressively stem
counterfeit chip production. Also, while Taiwan has made improvements in its
Power-of-Attorney (POA) procedures, we look forward to passage of the electronic
signatures act as a further step in simplifying POA procedures. The Taiwan authori-
ties are considering abandoning their Export Marketing System (EMS). While the
EMS has not been a particularly effective anti-piracy tool, there is concern over
eliminating it unless it is replaced with a well-enforced optical disc law. We under-
stand that Taiwan is currently not considering such a law.
8. Worker Rights
a. The Right of Association: Although the Labor Union Law (LUL) forbids civil
servants, teachers, and defense industry workers from organizing trade unions, the
Judicial Yuan’s 1995 constitutional right ruling led to the organization of the Na-
tional Teachers’ Association in February 1999. Taiwan’s authorities recently accept-
ed the registration of three national federations of labor unions (i.e., National Trade
Union Confederation, Chinese Labor Unions, and Taiwan Confederation of Trade
Unions) in addition to the KMT-related Chinese Federation of Labor, formerly the
only recognized island-wide labor union. In July workers unions of 18 state-owned
enterprises formed an alliance to protect their rights during privatization. As of
March, 2.9 million workers, or 29.6 percent of Taiwan’s labor force, belonged to
3,785 labor unions.
b. The Right to Organize and Bargain Collectively: The Labor Union Law, the Law
Governing the Handling of Labor Disputes, and the Collective Agreement Law offer
workers, except civil servants and defense industry workers, the right to organize
and bargain collectively. However, the laws restrict workers’ exercise of these rights.
The settlement of Labor Disputes Law forbids labor and management from dis-
rupting the working order where mediation or arbitration is in progress. Collective
bargaining agreements exist only in large-scale enterprises. As March of 2000, there
were 290 such collective agreements, down from 298 in June 1999.
c. Prohibition of Forced or Compulsory Labor: The Labor Standards Law (LSL)
prohibits forced or compulsory labor. The maximum jail sentence for violation of the
law is five years. Violations have been very rare. Suspected cases have involved
prostitution and crew-members on fishing boats.
d. Minimum Age for Employment of Children: The LSL stipulates the minimum
age for employment be 15, after completion of nine years compulsory education, as
required by law. County and city labor bureaus enforce minimum age laws. Child
labor is rare in Taiwan.
e. Acceptable Conditions of Work: The LSL mandates basic labor standards, cov-
ering all workers except teachers, civil servants, medical doctors, lawyers and spe-
cialized professional workers. Of 6.6 million workers, 5.7 million are protected by
the LSL. The minimum monthly wage remained unchanged in 1999 at NT$15,840
(or US$505), which was far below the average monthly manufacturing wage of
NT$43,003 (US$1,370) in 2000. The LSL is not well enforced in such areas as over-
time work, overtime pay and retirement pay. According to legislation in June 2000,
the biweekly working time will be cut from 96 to 84 hours beginning January 2001.
Other legislation requires government agencies to adopt a five-day-work system at
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the same time. Employers typically cover the majority of premiums for the national
health insurance and labor insurance programs, contribute to labor welfare funds,
and provide meals and transportation allowances.
f. Rights in Sectors with U.S. Investments: U.S. firms and joint ventures generally
abide by Taiwan’s labor laws and regulations. In terms of wages and other benefits,
worker rights do not vary significantly by industrial sector.
Extent of U.S. Investment in Selected Industries—U.S. Direct Investment Position Abroad on an
Historical Cost Basis—1999
[Millions of U.S. Dollars]
Category Amount
Petroleum .......................................................................... 60
Total Manufacturing ......................................................... 3,631
Food and Kindred Products .......................................... 44
Chemicals and Allied Products .................................... 1,804
Primary and Fabricated Metals ................................... (1)
Industrial Machinery and Equipment ......................... 317
Electric and Electronic Equipment .............................. 1,109
Transportation Equipment ........................................... (1)
Other Manufacturing .................................................... (1)
Wholesale Trade ............................................................... 614
Banking ............................................................................. 691
Finance/Insurance/Real Estate ........................................ 1,577
Services .............................................................................. 101
Other Industries ............................................................... 185
TOTAL ALL INDUSTRIES ............................................. 6,860
(1) Suppressed to avoid disclosing data of individual companies.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
THAILAND
Key Economic Indicators
[Millions of U.S. Dollars unless otherwise indicated]
1998 1999 2000 1
Income, Production, and Employment:
Nominal GDP ............................................................ 112,060 124,284 125,803
Real GDP growth (pct) 2 ............................................ –10.2 4.2 4.5 3
Nominal GDP by sector:
Agriculture ............................................................. 13,379 13,007 10,925
Manufacturing ....................................................... 34,350 40,232 41,458
Services ................................................................... 17,191 20,158 20,797
Government 4 .......................................................... 12,103 13,782 13,208
Per capita GDP (US$) ............................................... 1,823 2,016 2,019
Labor force (000s) ...................................................... 32,600 32,960 33,270 3
Unemployment rate (pct) .......................................... 4.4 4.2 3.2 3
Money and Prices (annual percentage growth):
Money supply growth (M2) ....................................... 9.5 2.1 N/A
Consumer price inflation .......................................... 8.1 0.3 2.5
Exchange rate (BHT/USD—annual average)
Official .................................................................... 41.37 37.84 40.00 5
Balance of Payments and Trade:
Total exports FOB 6 ................................................... 52,878 56,800 62,200 3
Exports to United States 6 .................................... 12,105 12,668 13,791 7
Total imports CIF 6 ................................................... 40,643 47,529 56,900 3
Imports from United States 6 ................................ 6,037 6,434 6,151 7
Trade balance 6 .......................................................... 12,236 9,271 5,300
Balance with United States 6 ................................ 6,068 6,234 7,640
External public debt .................................................. 31,060 36,024 34,866 8
Fiscal balance/GDP (pct) ........................................... –5.2 –5.3 –5.0 3
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Key Economic Indicators—Continued
[Millions of U.S. Dollars unless otherwise indicated]
1998 1999 2000 1
Current account/GDP (pct) ....................................... 12.8 10.0 7.7 3
Debt service payments/GDP (pct) ............................ 1.96 2.31 N/A
Gold and foreign exchange reserves ........................ 29,536 34,781 35,000 3
Aid from United States 9 ........................................... 5.5 20.8 N/A
Aid from All Other Sources 9 .................................... 105.8 110.7 N/A
All figures based on Royal Thai Government data.
1 2000 figures are all estimates based on six-month data unless otherwise indicated.
2 Percentage changes calculated in local currency.
3 Royal Thai Government projections.
4 Government expenditure on GDP; for illustrative purposes.
5 Based on nine-month data.
6 Merchandise trade under balance of payments concept.
7 Based on seven-month data.
8 Data as of July 2000.
9 Based on fiscal year (October-September).
1. General Policy Framework
The government of current Thai Prime Minister Chuan Leekpai has been working
to stabilize and reinvigorate the Thai economy since it took office in November 1997.
The East Asian economic crisis began in Thailand when a failed effort to defend the
baht (the Thai currency) depleted Thailand’s foreign exchange reserves and forced
the Bank of Thailand to float the currency in July 1997. Over the next six months
the baht lost half of its value, and the crisis spread to the real sector. The Thai
economy, one of the world’s fastest growing up through 1995, tumbled, and real
GDP suffered declines of 1.7 percent and 10.2 percent in 1997 and 1998, respec-
tively. The crisis spread to other countries in the region, particularly Korea and In-
donesia, impairing Thailand’s ability to export its way out of the crisis.
Real sector contraction slashed Thai imports, which dropped from $70 billion in
1996 to just over $40 billion in 1998 before rebounding to $48 billion in 1999 and
a projected $57 billion in 2000. Imports from the United States fell correspondingly,
dropping from $7.4 billion in 1997 to under $5 billion in 1999. At the same time,
U.S. markets remained open to Thai exports. By 1999, according to U.S. Depart-
ment of Commerce figures, the U.S. trade deficit with Thailand had widened to $9.3
billion. (Thai data shows a smaller deficit due to differences in trade calculation
methodology).
A $17.2 billion program arranged through the IMF in August 1997 helped Thai-
land begin restructuring its economy and financial sector. The government closed
or took over insolvent institutions and tightened provisioning requirements for
banks. The crisis and subsequent restructuring opened the way for increased foreign
participation in the financial sector, and foreign banks now own controlling interests
in four Thai commercial banks. The sale of another is underway. Legal reforms fo-
cused on the financial sector continue. Throughout, Thailand has favored a market-
oriented private sector-led approach to restructuring the financial sector. These im-
portant measures notwithstanding, the slow pace of economic restructuring raises
concerns about the sustainability of recovery.
While the economy stabilized by late 1998, the real economy did not respond, and
the focus turned to stimulating domestic demand. With the support of the IMF, the
government ran fiscal deficits (after years of balanced or surplus budgets) of 5.2 per-
cent of GDP in FY 1998, 5.3 percent of GDP in FY 1999, and a likely 5 percent
in FY 2000. In March and August 1999 the government announced additional stim-
ulus programs equal to 4.6 percent of GDP to create jobs, increase government pur-
chases of goods and services, lower taxes and industrial energy costs, and promote
investment. The economy responded to these stimulus programs with moderate im-
provements in most indicators from the first quarter of 1999. The government is fi-
nancing the stimulus program through domestic bond sales, as well as foreign debt
and grant assistance. The government recognizes the important role of foreign in-
vestment and in mid-2000 introduced new incentives designed to make Thailand a
more attractive destination for direct foreign investment.
Thai monetary policy formally aims at keeping inflation between zero and 3.5 per-
cent, but maintaining adequate system liquidity and keeping interest rates low to
promote debt restructuring and new lending are also major policy goals. The govern-
ment uses a standard array of monetary policy tools but focuses on open market
operations, particularly the repurchase market. Current monetary policy does not
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target a specific level for the baht, but the government has said it will act to smooth
volatility in the exchange rate.
2. Exchange Rate Policy
From 1984 to 1997 the baht was pegged to a basket of currencies of Thailand’s
major trading partners, with the dollar representing the largest share. The ex-
change rate averaged 25 baht to the dollar during that period. Following the deple-
tion of Thailand’s foreign exchange reserves in an unsuccessful attempt to defend
the peg, the currency was allowed to float in July 1997 and depreciated to below
50 baht per dollar by January 1998. As reform measures and IMF support took
hold, the baht stabilized and has traded in the 36 to 44 baht per dollar range since
March 1998.
The Thai government began liberalizing the exchange control regime in 1990 and
has accepted IMF Article VIII obligations. Commercial banks received permission to
process larger foreign exchange transactions, and ceilings on money transfers were
increased. Since 1991 Thai banks have offered foreign currency accounts for resi-
dents, although they are limited to $500,000 for individuals and $5 million for cor-
porations (without conditions). After the baht was floated in July 1997, the govern-
ment tightened conditions on foreign exchange, requiring customers to show evi-
dence of foreign currency obligations (within three months from date of deposit) to
open foreign currency accounts. Thailand also required exporters to repatriate and
deposit foreign exchange earnings more expeditiously. More recently, the govern-
ment has restricted the supply of baht at any one time to 50 million (about $1.25
million) per non-resident counter party (unless there is an underlying transaction
requiring the currency) to cut down on offshore speculation.
3. Structural Policies
Prices generally are determined by market forces. The government retains author-
ity to control the price of 14 products (certain food staples, transportation-related
items, agricultural inputs) under the recently revised Price of Goods and Services
Act of 1999. Although in practice few commodities are subject to formal price con-
trols, the government uses its control of major suppliers of products and services
under state monopoly, such as in petroleum, aviation, and telecommunications sec-
tors, to influence prices in the market. For example, under pressure from the gov-
ernment, the state petroleum company for a short period of time kept diesel fuel
prices below production cost in response to escalating international petroleum prices
in 2000.
The Thai taxation system has undergone significant revision since 1992, when a
value added tax (VAT) system was introduced to replace a multi-tiered business tax
system. The VAT rate was raised from 7 to 10 percent in 1997 but lowered tempo-
rarily back to 7 percent in March 1999 to stimulate consumption; the rate is sched-
uled to revert to 10 percent on September 30, 2001. Exemptions in place for low rev-
enue businesses were expanded in March 1999. Exporters are ‘‘zero rated’’ under the
VAT system but must file returns and apply for rebates. The corporate tax rate is
currently 30 percent of net profits for all firms. Thailand and the United States
signed a tax treaty in November 1996, and the treaty entered into force in early
1998. The treaty eliminates double taxation and gives U.S. firms tax treatment
equivalent to that enjoyed by Thailand’s other tax treaty partners.
The Board of Investment exerts wide-ranging influence on the formulation and
implementation of trade and investment policies. It has pushed its objectives of in-
dustrial decentralization and export promotion through the granting of tax holidays,
import duty exemptions, and other incentives to foreign direct investors. Thailand
has applied to the WTO for an extension of its local content requirements in the
manufacture of milk and dairy products, which have been in effect since 1995.
4. Debt Management Policies
Thailand’s financial crisis resulted in part from a large private sector external
debt burden, but these levels have declined markedly since the onset of the crisis,
falling from $85 billion at the end of 1997 to $53 billion at the end of June 2000.
(Private sector debt figures were revised significantly upwards in mid-2000). Thai-
land entered the crisis with low levels of public debt, but since then public bor-
rowings have risen significantly as the government stabilized and sought to stimu-
late the economy. At the end of 1997 total public sector external debt (including that
of the Bank of Thailand) stood at $24 billion. By June 2000, the figure had risen
to $35 billion. Public sector debt is mostly long-term and divided among direct bor-
rowings and loans to state-owned enterprises guaranteed by the government, with
the latter predominating. The public external debt service ratio (payments as a per-
cent of the exports of goods and services) stood at the end of June 2000 at 3.5 per-
cent, in comparison to a private sector debt service ratio of 11.7 percent.
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Mounting public sector debt, triggered by higher budget deficits, is a concern in
Thailand, and the government is attempting to diversify its sources of funding by
developing a domestic bond market. By April 2000, total public sector debt, includ-
ing the non-guaranteed debt of state-owned enterprises, had climbed to 52 percent
of Thailand’s GDP.
Thailand consistently met the targets and performance criteria elaborated in its
IMF stand-by arrangement, which was completed in June 2000. The government
plans to begin repaying the IMF in the fourth quarter of 2000 and other donors in
2001.
5. Significant Barriers to U.S. Exports
Tariffs: Thailand’s high tariff structure remains a major impediment to market
access in many sectors. A member of the World Trade Organization (WTO) and the
ASEAN Free Trade Area (AFTA), Thailand has yet to complete efforts to rationalize
a complicated tariff regime that currently has 23 rates. Highest tariff rates encom-
pass locally produced import-competing products, including agricultural products,
autos and auto parts, alcoholic beverages, fabrics, and some electrical appliances. In
some cases, tariffs on unfinished products are higher than on related finished prod-
ucts. In the aftermath of the financial crisis, the government increased duties, sur-
charges, and excise taxes on a range of ‘‘luxury’’ imports from wine to passenger
cars. However, the government continues to ease other import duties in line with
WTO and AFTA commitments, including most recently in July 2000, when it re-
duced tariffs on 542 items.
Corn and fresh potatoes are subject to a Tariff Rate Quota (TRQ) that limits im-
port levels. The restricted entry period for U.S. corn under the TRQ, generally Feb-
ruary to June, usually ensures that it is not competitive in the Thai market.
Import Licenses: Thailand is in the process of changing its import licensing proce-
dures to comply with its WTO obligations. Import licenses are required for 26 cat-
egories of items, down from 42 categories in 1995–1996. Licenses are required for
the import of many raw materials, petroleum, industrial, textiles, pharmaceuticals,
and agricultural items. Imports of used motorcycles and parts, household refrig-
erators using CFCs, and gaming machines are prohibited. Import of some items not
requiring licenses nevertheless must comply with applicable regulations of con-
cerned agencies, including extra fees and certificate of origin requirements in some
cases. Imports of food, pharmaceuticals, certain minerals, arms and ammunition,
and art objects require special permits from relevant ministries. A government com-
mitment to eliminate certificate of origin requirements for information technology
imports has not been implemented fully.
Service Barriers: In the banking sector, foreign banks are limited to three
branches (of which two must be outside of Bangkok and adjacent provinces) and
there are limits on expatriate management personnel, although foreign bankers re-
port that requests for additional personnel customarily are approved. Since 1997 for-
eign ownership of Thai banks can exceed 49 percent for a period of ten years. (For-
eign investors will not be forced to divest shares after 10 years, but will not be able
to purchase additional shares). Limits on foreign ownership of finance companies
and securities companies were also liberalized in the aftermath of the financial cri-
sis. As of May 1998, foreigners may hold majority stakes in Thai securities houses,
although there are minimum investment requirements.
Telecommunications: The provision of telecommunications services is dominated
by two state operators, the Telephone Organization of Thailand (TOT) and the Com-
munications Authority of Thailand (CAT). Private participation is currently limited
to concessions in wireless and fixed line sectors. The government’s telecommuni-
cations master plan calls for the corporatization of TOT and CAT, with a view to
privatization and coupling with strategic partners in the coming years. Thailand’s
WTO commitments require full market liberalization by 2006.
Professional Services: The Alien Occupation Law reserves to Thai nationals cer-
tain employment, including within certain professional services such as accounting,
architecture, law and engineering, the manufacture of traditional Thai handicrafts,
and manual labor. All foreign nationals must obtain a work permit for employment.
Standards, Testing, Labeling, and Certification: The Thai Food and Drug Admin-
istration (TFDA) requires permits for the importation of all food and pharmaceutical
products. Costs, testing, duration, and demands for proprietary information associ-
ated with the permitting process can be burdensome. Labels bearing product name,
description, net weight or volume and manufacturing/expiration dates, printed in
Thai and approved by the TFDA must be affixed to all imported food products.
Investment Barriers: Non-Thai businesses and citizens generally are not per-
mitted to own land unless given permission by the Board of Investment or unless
land is on government-approved industrial estates. Exceptions include land nec-
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80
essary to the activities of petroleum concessionaires, part ownership of condominium
buildings, and residences for foreign investors who invest a minimum of 40 million
baht.
Government Procurement Practices: Procurement regulations require that non-
discriminatory treatment and open bidding be accorded to all potential bidders.
However, the system is not fully transparent. Procuring agencies retain the right
to accept or reject any or all bids at any time, may modify the technical require-
ments during the bidding process, and are not bound to accept the lowest bid. The
government requires a counter-trade transaction on government procurement con-
tracts valued at more than 300 million baht on a case-by-case basis. A counter pur-
chase of Thai commodities valued at not less than 50 percent of the principal con-
tract may be required. As part of a counter-trade deal the government may also
specify markets into which commodities may not be sold, usually markets where
Thai commodities already enjoy significant access.
Customs Procedures: The Thai Customs Department enjoys considerable auton-
omy and some of its practices appear arbitrary and irregular. Problems in customs
administration include excessive paperwork and formalities, lack of coordination be-
tween customs and other import-regulating agencies, and lack of modern computer-
ized processes. Many importers complain of demands for unrecorded cash. Import
regulations are complicated, opaque and inconsistently applied. Efforts to introduce
a paperless customs system, including adoption of the World Customs Organization
harmonized code and the use of an Electronic Data Interchange (EDI) system, have
improved operations but have not been fully implemented. The pilot program for
EDI became operational early in 1998, but thus far affects only export procedures
and only in the airport, not in the seaports. Customs Act amendments that went
into effect January 2000 established transaction value as the standard for assessing
customs duties, but many officials reportedly are not applying the new standard.
6. Export Subsidies Policies
The government maintains several programs that benefit exports of manufactured
products or processed agricultural products. These include subsidized credit on some
government-to-government sales of Thai rice (agreed on a case-by-case basis), pref-
erential financing for exporters in the form of packing credits, tax certificates for
rebates of packing credits, and rebates of taxes and import duties for products in-
tended for re-export. The Thai Ex-Im bank currently offers interest rates on export
credits below the prime rate offered by commercial banks. A 2000 law established
a government office and fund to support small and medium enterprises, including
market expansion abroad, but they are not operational yet.
7. Protection of U.S. Intellectual Property
The government has made significant progress in laying the legal foundation for
IPR protection, and an IPR action plan concluded between the United States and
Thailand in 1998 strengthened levels of enforcement. During 1999 and 2000 the
government passed amendments to the Trademark Act and the Patent Act, a Pro-
tection of Plant Varieties Act, and a Protection of Integrated Circuits Design Law.
The parliament is deliberating on drafts of a Trade Secrets Act, a Protection of Geo-
graphic Indications Act, and an Optical Disk Factory Control Act. Despite growing
enforcement activity and good cooperation with rights-holders, however, the govern-
ment has been unable to stem high levels of piracy. Thailand has been on the Spe-
cial 301 Watch List since 1994. Thailand is a member of the World Intellectual
Property Organization, the Bern Convention, and the WTO Trade-Related Aspects
of Intellectual Property Agreement (TRIPS). Thailand is not a signatory to the Paris
Convention or Patent Cooperation Treaty, although aspects of those instruments are
addressed by local law.
A specialized intellectual property department in the Ministry of Commerce has
cooperated with U.S. industry associations to coordinate both legal reforms and en-
forcement efforts. A specialized intellectual property court established in 1997 has
improved judicial procedures and imposed higher fines. Criminal cases generally are
disposed of within six to twelve months from the time of a raid to the rendering
of a conviction. However, in many cases penalties imposed are insufficient deter-
rence according to rights-holders, and relatively few persons have served time in jail
for copyright infringement. Defendants sometimes disappear while on bail, and sen-
tences sometimes are reduced or overturned on questionable grounds.
Obstacles to effective enforcement are numerous. Resource limitations, especially
in the wake of the financial crisis, hamstring police capabilities and judicial admin-
istration alike. Corruption and a cultural climate of leniency can complicate many
phases of the legal process. Irregularities in police and public prosecutor procedures
occasionally have resulted in the substitution of insignificant defendants for major
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81
ones and the disappearance of vital evidence. The frequency of raids compromised
by leaks from police sources has declined but remains a concern. The administrative
structure of enforcement is confusing, with no fewer than three separate offices (the
Economic Crimes Investigation Division, the Special IPR Enforcement Task Force,
and the local police) with authority to conduct raids. Pirates, including those associ-
ated with transnational crime syndicates, have responded to stepped up levels of en-
forcement with intimidation against authorities and rights-holders.
Although trademark-holders have won several notable cases, civil remedies re-
main largely untested as most rights-holders, especially copyright holders, choose to
pursue criminal sanctions against violators. Rights-holders report that police co-
operation is good and the frequency of raids is climbing. However, police undertake
little enforcement apart from cases initiated by rights-holders. Effective prosecutions
are labor-intensive for rights-holders, who investigate, participate in raids, help
warehouse confiscated property, and prepare documentation for prosecution in a
typical case.
Patent examinations can take more than five years. Safety monitoring programs
(SMPs) must be undertaken prior to filing for full registration of pharmaceuticals,
and no generic versions of a drug can be approved for the two-year SMP period.
However, following the expiration of the SMP but before a patent is issued, often
a period of years, generic versions may be sold. In such cases, civil remedies to re-
cover damages suffered by the patent-holder are available after the patent is grant-
ed but are inadequate. The government retains compulsory licensing authority in
some instances but does not generally exercise it. The Government Pharmaceutical
Office’s exemption from registration and approval requirements in manufacturing
and distributing medicine is of concern to rights-holders, although the exemption is
not widely exercised.
The U.S. pharmaceutical, film, and software industries estimate lost sales to
American rights-holders at over $200 million annually. Piracy is growing as pirates
from elsewhere in the region have come to set up shop in Thailand, and imports
and exports of pirated products remain at troublesome levels. Although the govern-
ment has made progress in cultivating public support for strong intellectual prop-
erty protection, the market for pirated products remains strong.
8. Worker Rights
a. The Right of Association: The Labor Relations Act of 1975 gives workers in the
private sector most internationally recognized labor rights, including the freedom to
associate. They may form and join unions and make policy without hindrance from
the government and without reprisal or discrimination for union activity. Unions in
Thailand may have relationships with unions in other countries, and with inter-
national labor organizations. The State Enterprise Labor Relations Act, enacted in
early 2000, restored to state enterprise workers the right to form and join trade
unions.
b. The Right to Organize and Bargain Collectively: Thai workers have the right
to bargain collectively over wages, working conditions, and benefits. About 900 pri-
vate sector unions are registered in Thailand. Civil servants cannot form unions.
State enterprise employees, essential workers (transportation, education, and health
care personnel), and civil servants may not strike. However, they may be members
of employee associations. Though recognized, collective bargaining is unusual in
Thailand, and industry-wide collective bargaining is all but unknown. However, rep-
resentatives of public sector associations and private sector unions do sit on various
government committees dealing with labor matters, and are influential in setting
national labor policies, such as the minimum wage.
c. Prohibition of Forced or Compulsory Labor: The Thai Constitution prohibits
forced or compulsory labor except in cases of national emergency, war, or martial
law. However, Thailand remains the target of ILO actions under Convention 29
(forced labor) because child prostitution persists despite recent government moves
to step up enforcement of laws prohibiting it, and to cooperate with ILO programs.
d. Minimum Age for Employment of Children: The new 1998 Labor Protection Act
went into effect on August 20, 1998. The act raises the minimum age for employ-
ment in Thailand from thirteen to fifteen. Persons between the ages of 15 to 18 are
restricted to light work in non-hazardous jobs, and must have the permission of the
Department of Labor in order to work. Nighttime and holiday employment of non-
adults is prohibited. The new national education bill passed in August 1999 gives
the children the right to free primary education through grade 12. Compulsory edu-
cation is enforced through grade nine.
e. Acceptable Conditions of Work: Working conditions vary widely in Thailand.
Large factories generally meet international health and safety standards, though
there have been serious lapses involving loss of life. The government has increased
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the number of inspectors and raised fines for violators, but enforcement is still not
rigorous. The usual workday in industry is eight hours. Wages in profitable export
industries often exceed the legal minimum. However, in the large informal indus-
trial sector wage, health, and safety standards are low and regulations are often ig-
nored. Most industries have a legally mandated 48-hour maximum workweek. The
major exceptions are commercial establishments, where the maximum is 54 hours.
Transportation workers are restricted to 48 hours per week.
f. Rights in Sectors with U.S. Investment: Labor rights are generally respected in
industrial sectors with heavy investment from U.S. companies. Most U.S. firms in
Thailand work with internal workers’ representatives or unions, and relations are
constructive. U.S. companies strictly adhere to Thai labor laws.
Extent of U.S. Investment in Selected Industries—U.S. Direct Investment Position Abroad on an
Historical Cost Basis—1999
[Millions of U.S. Dollars]
Category Amount
Petroleum .......................................................................... 2,529
Total Manufacturing ......................................................... 2,571
Food and Kindred Products .......................................... 113
Chemicals and Allied Products .................................... 312
Primary and Fabricated Metals ................................... 70
Industrial Machinery and Equipment ......................... 1,359
Electric and Electronic Equipment .............................. 366
Transportation Equipment ........................................... 40
Other Manufacturing .................................................... 311
Wholesale Trade ............................................................... 416
Banking ............................................................................. 625
Finance/Insurance/Real Estate ........................................ 385
Services .............................................................................. 49
Other Industries ............................................................... 391
TOTAL ALL INDUSTRIES ............................................. 6,966
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
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